EC120 25TH OCT 2025 Midterm Review KEY CONCEPT
Introduction to Microeconomics (Wilfrid Laurier University)
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Chapter 1: Introduction to Economic Principles
1. Cost-Benefit Principle
The Cost-Benefit Principle suggests that we should evaluate the full set of costs and benefits
when making decisions. To make an optimal choice, we compare the benefits of a particular
action to its costs. The key question: “Do the benefits outweigh the costs?”
● Economic Surplus: The difference between the total benefit of a choice and the total
cost. Aim to maximize this surplus.
● Framing Effects: How choices are presented can influence decisions, but they should
be avoided. Focus on objective costs and benefits, not emotional responses.
Example: Imagine deciding whether to bike or drive to work. If biking saves money on gas and
parking while giving you exercise, but takes more time, the cost-benefit analysis will compare
these elements to determine which option maximizes your economic surplus.
2. Opportunity Cost
Opportunity Cost is the value of the next best alternative that you give up when you make a
choice. Every decision involves trade-offs, and the true cost of anything is what you sacrifice by
not choosing the alternative.
● Ignore Sunk Costs: Sunk costs are past costs that cannot be recovered and should not
influence current decisions.
Example: If you spend $1,000 on a gym membership but don’t use it, the money spent is a sunk
cost. Your decision to go to the gym today should depend on whether the benefits (health,
, fitness) outweigh the time cost, not on the money you’ve already spent.
3. Marginal Decision-Making
Many decisions are marginal—they involve small incremental changes rather than
all-or-nothing choices. The principle is to consider the marginal benefit (MB) and marginal
cost (MC) of an additional action.
● Rational Rule: Take an action if the marginal benefit is greater than or equal to the
marginal cost (MB ≥ MC).
Example: If you’re deciding between studying for one more hour or taking a work shift, you
compare the marginal benefit of better grades (from studying) to the marginal cost (lost wages
from not taking the shift).
4. Interdependence Principle
Introduction to Microeconomics (Wilfrid Laurier University)
=
Chapter 1: Introduction to Economic Principles
1. Cost-Benefit Principle
The Cost-Benefit Principle suggests that we should evaluate the full set of costs and benefits
when making decisions. To make an optimal choice, we compare the benefits of a particular
action to its costs. The key question: “Do the benefits outweigh the costs?”
● Economic Surplus: The difference between the total benefit of a choice and the total
cost. Aim to maximize this surplus.
● Framing Effects: How choices are presented can influence decisions, but they should
be avoided. Focus on objective costs and benefits, not emotional responses.
Example: Imagine deciding whether to bike or drive to work. If biking saves money on gas and
parking while giving you exercise, but takes more time, the cost-benefit analysis will compare
these elements to determine which option maximizes your economic surplus.
2. Opportunity Cost
Opportunity Cost is the value of the next best alternative that you give up when you make a
choice. Every decision involves trade-offs, and the true cost of anything is what you sacrifice by
not choosing the alternative.
● Ignore Sunk Costs: Sunk costs are past costs that cannot be recovered and should not
influence current decisions.
Example: If you spend $1,000 on a gym membership but don’t use it, the money spent is a sunk
cost. Your decision to go to the gym today should depend on whether the benefits (health,
, fitness) outweigh the time cost, not on the money you’ve already spent.
3. Marginal Decision-Making
Many decisions are marginal—they involve small incremental changes rather than
all-or-nothing choices. The principle is to consider the marginal benefit (MB) and marginal
cost (MC) of an additional action.
● Rational Rule: Take an action if the marginal benefit is greater than or equal to the
marginal cost (MB ≥ MC).
Example: If you’re deciding between studying for one more hour or taking a work shift, you
compare the marginal benefit of better grades (from studying) to the marginal cost (lost wages
from not taking the shift).
4. Interdependence Principle
