Economics is a study of how people make choices under scarcity and the results of the decisions.
Scarcity Principle(aka No Free-Lunch Principle) describes that human have boundless wants but with limited resources. Having more of one good thing usually means having less of another.
Economic Surplus of an action is equal to its total benefit minus total cost.
Opportunity Cost is the value of the best alternative foregone in order to undertake an activity.
Four Decision Pitfalls
- Measuring costs and benefits as proportions instead of absolute amounts
You can earn $170 in 6 months from buying Nvidia stock at $330.
You can earn $170 in 6 months from buying Tesla stock at $130.
Which stock will you buy?
They are the same, both stocks can return a $170 profit to you if you are ‘rational’ - Ignoring implicit costs
A decision which leads to lower income, but is not recorded on the balance sheet. - Failed to ignore sunk cost
Sunk costs are the costs that are beyond recovery at the moment of decision. Typically, it is something you have paid and no refund is available. - Failed to think at the average-marginal distinction
Marginal cost/benefit is the increase in total cost/benefit that results from carrying one additional unit of an activity.
Average cost/benefit is total cost/benefit divided by the number of units.
Marginal Analysis
Do not think of the average cost
Microeconomics studies choice and its implications for price and quantity in individual markets.
Macroeconomics studies the performance of national economies and the policies that governments use to try to improve that performance.
Normative economic principle says how people should behave.
Positive economic principle predicts how people will behave.
