Microeconomic Principles – Business Integrals

Principles of Microeconomics

Scarcity/ Opportunity Cost	Most resources are scarce, not infinite The alternative use of a resource (next best option) is the opportunity cost
Rationality	Assumes that economic actors make decisions logically E.g. if two products are exactly the same, choose the lower cost good
Ceteris Paribus	Controlling all other factors so that one factor can be looked at in isolation E.g. market experiments done in identical environments to focus on one factor
Efficiency	One person can’t be made better off without causing detriment to another E.g. if property in an auction goes to the third-highest bidder, this is inefficient

Take an action if the benefit outweighs the cost E.g. do I eat chocolate, which will make me gain weight?	Incremental benefit should outweigh the incremental cost E.g do I eat a second piece of chocolate, when it is less satisfying than the first?
In decision-making, only explicit costs and opportunity costs should be considered. The types of costs are:
Explicit/payment	The amount that you pay
Opportunity Cost	The next best alternative
Sunk Cost	Costs that cannot be recovered – these should not factor into cost/benefit analysis (e.g cost of a buffet lunch has been paid, therefore eat as much as you like)
Absolute Cost	Total cost
Marginal Cost	Cost for each additional unit
Utility	Usefulness or value derived from a good or service