Microeconomics Chapter 1 1.1 The scarcity principle (also called the no-free-lunch principle). Although we have boundless needs and wants, the resources available to us are limited. Consequently, having more of one good thing usually means having less of another. 1.2 The cost-benefit principle. An individual (or a firm, or a society) should undertake a particular action if, and only if, the extra benefits of undertaking that action are at least as great as the extra costs. 1.3 Economic Surplus is the gain that results from undertaking an action when the benefits outweigh the costs. Simply, it is the difference between the benefit and its cost. Opportunity cost is the value of the next-best alternative to undertaking a particular action. The incentive principle. A person (or firm, or society) is more (less) likely to undertake an action if its benefit (cost) rises, and less (more) likely to undertake it if its cost (benefit) rises. In short, incentive matter, and can be powerful in shaping economic choices. Predicting how people's behaviour will be affected when the incentives they face change is the role of positive economic analysis. In contrast, normative economics is concerned with statements about what actions should or ought to be undertaken. 1.4 A sunk cost is a cost that cannot be recovered at the moment a decision is made. Chapter 2 2.1 The principle of comparative advantage is everyone can do better when each person (or each country) concentrates on the activities for which their opportunity cost is lowest (or for which they have a comparative advantage) 2.2 Production Possibility Curve (PPC) is a graph that describes the maximum amount of one good that can be produced for every possible level of production for another good. Example: Tom has a comparative advantage in nuts because his PPC has a flatter slope on the nuts axis.

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