sg02 - 2 The Key Principles of Economics Chapter Summary...

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2 The Key Principles of Economics Chapter Summary This chapter introduces five key principles of economics. You’ll see these principles again in each chapter of the book. The five key principles are: Principle of Opportunity Cost: The opportunity cost of something is what you sacrifice to get it. The Marginal Principle: Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost. Principle of Voluntary Exchange: A voluntary exchange between two people makes both people better off. Principle of Diminishing Returns: Suppose that output is produced with two or more inputs, and we increase one input while holding the other inputs fixed. Beyond some point—called the point of diminishing marginal returns—output will increase at a decreasing rate. The Real–Nominal Principle: What matters to people is the real value of money or income—its purchasing power—not the face value of money or income. Applying the Concepts After reading this chapter, you should be able to answer these seven key questions: 1. What is the opportunity cost of running a business? 2. What are society’s tradeoffs between different goods? 3. How do firms think at the margin? 4. What is the rationale for specialization and exchange? 5. Do farmers experience diminishing returns? 6. How does inflation affect the real minimum wage? 7. How does inflation affect lenders and borrowers? ± Study Tip While the concepts introduced in this chapter may seem very elementary, they are quite important. In fact, the rest of the book is an application of the principles in this chapter. As you go through the text, you may wish to look back and see how different topics are examples of these five principles.
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18 Chapter 2 2.1 The Principle of Opportunity Cost To make a good decision we must compare the benefits of the decision with the costs. The important cost concept for decision making is that of the opportunity cost , what you sacrifice to get something. It is important to recognize that opportunity costs often don’t involve spending money. Waiting in line is a cost: You sacrifice time you can’t get back. Would you wait in line for 15 minutes at a gas station to save $1 on a tank full of gas instead of paying $1 more at a gas station with no line? In this case you need to recognize that sacrificing your time is part of the cost of the gasoline. Only if you value 15 minutes of time at less than $1 would you want to wait in line. An opportunity cost can involve both time and money. When evaluating the costs of college, some costs, such as tuition and books, are obvious because they involve spending money. Some costs are not obvious, because they don’t involve spending money. The income you give up by going to college instead of taking a full-time job is a cost. You sacrificed the income you could have earned to go to college. Some things we think of as costs are not relevant to the decision.
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This note was uploaded on 10/25/2009 for the course ECON 81509 taught by Professor X.song during the Spring '09 term at Mesa CC.

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sg02 - 2 The Key Principles of Economics Chapter Summary...

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