Survey of Economics Principles, Applications & Tools (PDF)

Survey of Economics: Principles, Applications and Tools Eighth Edition Chapter 2 The Key Principles of Economics Copyrigh...

Survey of Economics: Principles, Applications and Tools Eighth Edition Chapter 2 The Key Principles of Economics Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved 2.1 The Principle of Opportunity Cost Apply the principle of opportunity cost. Economics is all about making choices; to make good choices, we must compare the benefit of something to its cost. Opportunity Cost: What you sacrifice to get something. “There is no such thing as a free lunch” Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved The Cost of Military Spending The war in Iraq cost the United States an estimated $1 trillion. Each $100 billion could: Enroll 13 million preschool children in the Head Start program for one year. Hire 1.8 million additional teachers for one year. Immunize all the children in less-developed countries for the next 33 years. The true cost of the war was its opportunity cost: what the United States sacrificed for it. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Figure 2.1 Scarcity and the Production Possibilities Curve (1 of 3) Production possibilities curve: A curve that shows the possible combinations of products that an economy can produce, given that its productive resources are fully employed and efficiently used. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Figure 2.1 Scarcity and the Production Possibilities Curve (2 of 3) The production possibilities curve illustrates the principle of opportunity cost for an entire economy. An economy has a fixed amount of resources. If these resources are fully employed, an increase in the production of wheat comes at the expense of steel. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Figure 2.1 Scarcity and the Production Possibilities Curve (3 of 3) Each additional 10 tons of wheat requires sacrificing progressively more steel— 50 tons from a to b, 180 tons from c to d. Some resources are better suited for steel production, and some are better suited to wheat production. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Figure 2.2 Shifting the Production Possibilities Curve An increase in the quantity of resources or technological innovation in an economy shifts the production possibilities curve outward. Starting from point f, a nation could produce more steel (point g), more wheat (point h), or more of both goods (points between g and h). Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved 2.2 The Marginal Principle Apply the marginal principle. We rarely make all-or-nothing choices. Economists tend to think in marginal terms: the effect of a small or incremental change. Marginal benefit: The additional benefit resulting from a small increase in some activity. Marginal cost: The additional cost resulting from a small increase in some activity. 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. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Application 2: Hiring people 2.3 The Principle of Voluntary Exchange Apply the principle of voluntary exchange. Why would two people trade with one another? Because each believes that what they receive is worth more to them than what they give. The principle of voluntary exchange: A voluntary exchange between two people makes both better off. Example: When you work, you trade your time for money. The money is more valuable than the time to you, and your time is more valuable than the money to your employer. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved 2.4 The Principle of Diminishing Returns Apply the principle of diminishing returns. You run a small copy shop with one copying machine and one worker, who can copy 500 pages per hour. You add another worker, but output increases to only 800 pages per hour, not doubling to 1,000. Why? They now share the copier, so each is less productive. The principle of diminishing returns: Suppose output is produced with two or more inputs, and we increase one input while holding the other input or inputs fixed. Beyond some point—called the point of diminishing returns—output will increase at a decreasing rate. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Why Do Diminishing Returns Occur? Diminishing returns occurs because one of the inputs to the production process is fixed. When a firm can vary all its inputs, including the size of the production facility, the principle of diminishing returns is not relevant. If you doubled both the number of workers and equipment, output ought to double also—or maybe more than double, if specialization is beneficial. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved 2.5 The Real-Nominal Principle Apply the real-nominal principle. Most modern money is not inherently valuable, but is valuable because of what it will buy. The real-nominal principle: What matters to people is the real value of money or income—its purchasing power—not its face value. Nominal value: The face value of an amount of money. Real value: The value of an amount of money in terms of what it can buy. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Table 2.2 The Real Value of the Minimum Wage, 1974–2015 Blank 1974 2015 Minimum wage per hour $2.00 $7.25 Weekly income from minimum wage 80 290 Cost of a standard basket of goods 47 236 Number of baskets per week 1.70 1.23 Between 1974 and 2015, the federal minimum wage increased from $2.00 to $7.25. Was the typical minimum-wage worker better or worse off in 2015? We can apply the real-nominal principle to see that the value of the minimum wage has actually decreased over this time period. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved