the study of how people make choices under conditions of scarcity and of the results
of those choices for society.
compromise between two wants/desires.
Scarcity (of resources)
a fundamental fact in life. The lack of resources leads to choices and tradeoffs (e.g.
Catan – road or settlement).
the study of the aggregate economy (i.e. it’s the big picture, composed of the sum of
all the microeconomies)
the study of all the little bits (i.e. it’s whether the farmer will grow bananas or
apples, it’s whether the shirts industry will use 80% or 90% cotton, it’s the
examination of one individual facet).
the value of the next-best alternative choice/action. (i.e. when making a choice we
lose the option of taking the alternative)/
What you give/spend (e.g. spend $10 seeing a movie)
what you lose (of your own resources) (e.g. lose 2 hours of time and 10 marks for
(The total cost/benefit for n things)/n. It’s how much we’ve made.
Essentially synonymous with ‘extra’. It’s the total cost/benefit increase in relation to
the increase in some activity. It’s how many we should make/sell.
we should only take action if the extra benefits outweigh the extra (opportunity)
Sunk Cost Fallacy
The cognitive bias where people feel invested in spent money, rather than realizing
rationally that it is irrelevant in any current decision. (e.g. spending $100 (non-
refundable etc) on a plane ticket to see a show, before deciding to do a more fun
activity back home. The $100 is spent either way, which would you prefer to see?)
Low Hanging Fruit Principle
It is Economically Efficient to pursue activity with the lowest opportunity cost first.
all people are rational people, they have well-defined goals and they try to fulfill
these as best as they can.
Ceteris Paribus Assumption
‘All else equal’. Essentially ignore the ripple effect comparing two scenarios, and
imagine that all other variables are fixed.
benefit – cost (e.g. save $10, but lose $9 of pay = :))
(e.g. save $10, but lose $11 of pay = :()
Bob being able to perform a task/produce a good or service with fewer resources
Mary’s opportunity cost of performing a task/producing a good or service is less
than Bob’s opportunity cost.
Production Possibilities Curve (PPC)
A graph that has the maximum amount of good x at every amount of good y
One that doesn’t trade with the rest of the world
Consumption possibilities == Production possibilities
No trade barriers, trades with everyone
Consumption possibilities > Production possibilities (usually)
The Law of Diminishing Returns
Progressive decrease in marginal benefits as production increases more and more
Market (of a good or service)
All buyers (demanders) and sellers (suppliers) of a particular good or service.
Central Planning/Regulated Market
All economic decisions are made by an individual or small group of small individuals
(examples are communist countries)
This often leads to a mismatch between things like the number of gearsticks for
tractors and the number of wheels for tractors.
Individuals interact in private markets and make production and distribution
If consumers want it, producers make it.
Intention to buy, i.e. willingness and ability to buy a G/S at the offered price. (Is
Graphical representation of a relationship between the amount of a good or service
that buyers want to purchase in and at a given time and price.
Changes in the point along the Demand Curve based on a change in price.
Buyer's Reservation Price
The value the buyer attributes to the good/service (e.g. the most they're willing to
pay for it).
Graphical representation of the relationship between the amount of goods and
services that a seller wants to supply in and at a given time frame and price.
Seller's Reservation Price Smallest amount a seller is willing to sell each additional unit for (usually the
The sum of a bunch of individual people's demand curves.
The financial ability to buy goods or services.
The less substitutes there are, the steeper the curve (define substitutes)
Real Income Effect
Purchasing power changes with price change (i.e. you can buy more or less for the
Two products that are linked. E.g. cars and petrol, tennis courts and tennis balls, etc
An alternative product (often inferior) that can be purchased instead of a 'normal'
When the system is at rest, with no tendencies for either Demand