1. Profit
    Revenue (from sales) minus the opportunity cost of producing the goods or service
  2. Marginal Decision Rule
    If the marginal (extra) benefit exceeds the marginal cost of a choice then do it.
  3. Incentive
    A change that causes one to act,i.e. prospect of a reward or punishment
  4. You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car “as is. What is the $1000 already spent considered?
    Sunk Cost (irrelevant to current dectision)
  5. Market
    A group of buyers and sellers
  6. “Organize Economic Activity” means determining?
    What goods to produce, How to produce them, How much to produce, Who gets them
  7. Market Economy:
    Allocates resources through the decentralized decisions of many households and firms as they interact in markets
  8. “Led by an invisible hand” insight by
    Adam Smith in The Wealth of Nations (1776)
  9. Invisible Hand theory: What determines prices?
    The interaction of buyers and sellers
  10. Invisible Hand theory: What does each price reflect?
    Each price reflects the good’s value to buyers and the cost of producing the good
  11. Invisible Hand theory: Prices guide self-interested households and firms to make decisions that, in many cases:
    Maximize society’s economic well-being.
  12. Efficiency:
    society gettting most from its scarceresources
  13. Equality:
    prosperity is distributed uniformly amongsociety’s members
  14. Tradeoff:
    To get greater equality, couldredistribute income from wealthy to poor.But this reduces incentive to work and produce,shrinks size of economic “pie.”
  15. What is the relationship between tradeoffs and incentive
    tradeoffs diminish incentive
  16. Making decisions requires
    comparing the costsand benefits of alternative choices.
  17. The opportunity cost of any item is
    relevant cost for decision making (what must be given up to obtain it)
  18. marginal changes –
    • incremental adjustmentsto an existing plan.
    • (price to charge or how many employees)
  19. Rational people ____and ___do their best toachieve their objectives.
    .systematically, purposefully
  20. Rational people make decisions by evaluating:
    costs and benefits of marginal changes – incremental adjustmentsto an existing plan.
  21. Profit equals?
    Revenue (sales) minus the opportunity cost of producing the good
  22. Marginal Decision Rule:
    If the the Marginal (extra) benefit exceeds the opportunity cost then do it
Card Set