Macro Economics Chapter 2

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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.

Production Possibilities Curve

A curve that shows the possible combinations of products that an economy can produce, given that it's productive resources are fully employed and efficiently used.

Each Economic Choice has an opportunity Cost pg.29

Economics is all about making choices, and to make good choices we must compare the benefit of something to its cost. Opportunity Cost incorporates the notion of scarcity: No matter what we do, there is always a trade-off. We must trade off one thing for another because resources are limited and can be used in different ways. By acquiring something, we use up resources that could have been used to acquire something else. The notion of opportunity cost allows us to measure this trade-off. The book gives this example: Your choices are studying for economics, history, or working a $10/hour job. If you choose studying for history, the 4 extra points you earn on your exam are 4 extra points you will not earn on your economics exam. Also, the $10/hour is another opportunity cost because you chose to study.

Marginal Principle pg.33

Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Based on a comparison of the marginal benefits and marginal costs.

Nominal Value

The face value of an amount of money

Businesses apply the marginal principle in order to achieve profit pg.33

The marginal principle is based on comparison of the marginal benefits and marginal costs of a particular activity. The marginal benefit of an activity is the additional benefit resulting from a small increase in activity. For example, the marginal benefit of keeping a bookstore open for one more hour equals he additional revenue from book sales. Similarly, the marginal cost is the additional cost resulting from a small increase in activity. The marginal cost of keeping a bookstore open for one more hour equals the additional expenses for workers and utilities during that hour. Applying the marginal principle, the bookstore should stay open the extra hour if the marginal benefit (additional sales) is at least as large as the marginal cost (the additional costs). For example, if the marginal benefit is $80 and the marginal cost is $30, staying open gets the bookstore an extra $50. We can use marginal principle to determine whether a one-unit increase in a variable would make us better off.

Real Value

The value of an amount of money in terms of what it can buy

Opportunity Cost

What you sacrifice to get something

Principle of voluntary exchange pg.37

a voluntary exchange between two people makes both people better off. The principle of voluntary exchange is based on the notion that people act in their own self-interest. Self-interested people won't exchange on thing for another unless the trade makes them better off. If you have a job, you voluntarily exchange your time for money, and your employer exchanges money for your time.

Principle of diminishing returns

suppose output is produced


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