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Unformatted text preview: CHAPTER 2 KEY PRINCIPLES OF ECONOMICS 1. Chapter Summary 2. Chapter Objectives 3. Chapter Outline Teaching Tips/Topics for Class Discussion 4. Extended Examples Extended Example 1: Saturday Choices Extended Example 2: Allocation of Societal Resources 5. Problems And Discussion Questions 6. Model Answers to Questions: Chapter Opening Questions Test Your Understanding Using the Tools 7. Economics Applied- Using What Youve Learned 8. Economic Experiment: Producing Fold-its 1. Chapter Summary Chapter Two introduces the key principles that are central to all economic theory. The principle of opportunity cost states that the opportunity cost of something is what you sacrifice to get it. Opportunity costs in production are generally increasing, and thus, the production possibilities curve is bowed outward. The marginal principle states that any activity should be increased as long as the marginal benefits of the additional activity exceed the marginal costs. The principle of diminishing returns states that, in the short run, if use of one input is increased while all others are held constant, production will eventually increase at a decreasing rate. The voluntary exchange principle states that that a voluntary exchange between two people makes both people better off. The reality principle states that what matters to economic agents is the real value or purchasing power of money or income, not its face or nominal value. 2. Chapter Objectives 1. What do military goods such as bombs and warships really cost in terms of what we sacrifice to pay for them? 2. When is it sensible to tighten the emissions standards on cars in order to reduce pollution? Does it ever make sense to loosen emissions standards? 8 9 Chapter 2 3. After a market transaction is completed, both peoplebuyer and seller usually say, Thank you. Are they just being polite, or is there a reason to be thankful? 4. If a firm doubles its workforce, is the companys total output likely to double too? 5. If you graduate with $20,000 in student loans, which type of an economy would make it easier for you to repay them: one with steady prices, one with rising prices (inflation), or one with falling prices (deflation)? 3. Chapter Outline I. The Principle of Opportunity Cost A. Definition 1. The opportunity cost of something is what you sacrifice to get it. 2. What you sacrifice is the next best choice. B. Opportunity Cost and Production Possibilities 1. The Production Possibilities Curve (illustration of feasible production given scarcity) 2. Discussion of relevant points on the PP diagram a. Points on the curve (efficient, utilizing all resources) b. Inside the curve (inefficient, not utilizing all resources or resources not used in the least-cost manner) c. Outside the curve (not feasible given current Technologies & Resources) 3. Shifts in the Production Possibilities Curve a. Increased Resourcesa....
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- Spring '08