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Economic Notes Chapter 2

Economic Notes Chapter 2 - • Principle of Voluntary...

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Economic Notes Chapter 2 Principle of Opportunity Cost – The opportunity cost of something is what you sacrifice to get it Principle – a self-evident truth that most people readily understand and accept Opportunity cost – what you sacrifice to get something Production possibilities curve – shows the possible combinations of products that an economy can produce The Marginal Principle – Increase the level of activity as long as its marginal benefit exceeds its marginal cost Marginal benefit – additional benefit resulting from a small increase in some activity Marginal cost – additional cost resulting from a small increase in some activity
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Unformatted text preview: • 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...
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