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Macroeconomics Principles
Applications and Tools 8th Edition
OSullivan Solutions Manual
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2
The Key Principles
of Economics
Chapter Summary
Chapter 2 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 voluntary exchange states that a voluntary exchange between two people makes
both people better off.
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 real-nominal principle states that what matters to people is the real value or purchasing
power of money or income, not its face or nominal value.
Learning Objectives:
1. Apply the principle of opportunity cost.
2. Apply the marginal principle.
3. Apply the principle of voluntary exchange.
4. Apply the principle of diminishing returns.
5. Apply the real-nominal principle.
12
©2014 Pearson Education, Inc.
Chapter Outline
2.1 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 alternative.
3. For example, if you choose to buy a cup of coffee, you are giving up the money it costs to
buy it. What else would you have used the $2.00 for? The opportunity cost of the coffee is the
one thing (or next best alternative) that you would buy if not the coffee.
Teaching Tip
Ask the students what they would be doing if they weren’t in class. Answers will range
from sleeping, working, watching TV, studying, etc. You can make the point that the
alternatives are infinite and computing the cost of them all is impossible. However, since
they could only be doing one thing (not all of them) if they were not in class, determining
the opportunity cost requires only knowing the one thing they would be doing.
Teaching Tip
It’s also helpful to have a discussion about whether room and board should be considered a
cost of college. If the person has to pay the same amount for room and board whether
he/she goes to college or works, it should not be considered a cost of college.
Teaching Tip
Use something students are familiar with to construct their first production possibilities
curve. Pick two classes, such as Economics and Marketing. Tell them they are going to
allocate study time to produce grades in the classes. The choice involves how much study
time to allocate for each class. You can start with an all-or-nothing scenario producing an
A|F outcome and make adjustments from there. Once they are comfortable, remind them
that everything else was held constant. Ask them what would happen to the curve if the
professors were better teachers, if students had better study skills, smaller classes, better
textbooks, upgraded computers, or more time to study.
This Application gives an example of a business to explain how we can use the principle of opportunity
cost to compute a business’s costs. In a business, the total costs are affected by the costs of raw materials,
the opportunity costs of funds invested, and the opportunity costs of time. This Application shows that we
must include not just the costs of materials but also the opportunity cost of funds invested, as well as the
opportunity costs of time in computing the true cost of running a business.
Teaching Tip
There are several easy-to-understand examples of the Marginal Principle in the world of
college students. An easy way to start is with examples where the marginal cost is zero:
The amount of food consumed at a particular meal in the cafeteria; Internet minutes in the
computer lab; cell phone weekend minutes with some plans. Given that the marginal costs
are zero, the student’s decision to consume is based on positive marginal benefits. You can
then introduce situations where there are positive marginal costs, such as fast food that
needs to be paid for.
SEC. III.—PRIVILEGE.
SEC. IV.—ELECTIONS.
SEC. V.—QUALIFICATIONS.
[The Senate of the United States shall be composed of two
Senators from each State, chosen by the Legislature thereof for six
years, and each Senator shall have one vote.]
[Immediately after they shall be assembled in consequence of the
first election, they shall be divided as equally as may be into three
classes. The seats of the Senators of the first class shall be vacated at
the end of the second year; of the second class at the expiration of the
fourth year; and of the third class at the expiration of the sixth year;
so that one-third may be chosen every second year; and if vacancies
happen, by resignation or otherwise, during the recess of the
Legislature of any State, the executive thereof may make temporary
appointments until the next meeting of the Legislature, which shall
then fill such vacancies. Const., I, 3.]
[No person shall be a Senator who shall not have attained to the
age of thirty years, and been nine years a citizen of the United States,
and who shall not, when elected, be an inhabitant of that State for
which he shall be chosen. Const. I, 3.]
[The House of Representatives shall be composed of members
chosen every second year by the people of the several States; and the
electors in each State shall have the qualifications requisite for
electors of the most numerous branch of the State Legislature.
Const., I, 2.]
[No person shall be a Representative who shall not have attained
to the age of twenty-five years and been seven years a citizen of the
United States, and who shall not, when elected, be an inhabitant of
that State in which he shall be chosen. Const., I, 2.]
[Representatives and direct taxes shall be apportioned among the
several States which maybe included within this Union, according to
their respective numbers; which shall be determined by adding to the
whole number of free persons, including those bound to service for a
term of years, and excluding Indians not taxed, three-fifths of all
other persons. The actual enumeration shall be made within three
years after the first meeting of the Congress of the United States, and
within every subsequent term of ten years, in such manner as they
shall by law direct. The number of Representatives shall not exceed
one for every thirty thousand, but each State shall have at least one
Representative. Const., I, 2]
[When vacancies happen in the representation from any State, the
executive authority thereof shall issue writs of election to fill such
vacancies. Const., I, 2.]
[No Senator or Representative shall, during the time for which he
was elected, be appointed to any civil office under the authority of
the United States which shall have been created, or the emoluments
whereof shall have been increased, during such time; and no person
holding any office under the United States shall be a member of
either House during his continuance in office. Const., I, 6.]
SEC. VI.—QUORUM.
SEC. VIII.—ABSENCE.
[No member shall absent himself from the service of the Senate
without leave of the Senate first obtained. And in case a less number
than a quorum of the Senate shall convene, they are hereby
authorized to send the Sergeant-at-Arms, or any other person or
persons by them authorized, for any or all absent members, as the
majority of such members present shall agree, at the expense of such
absent members, respectively, unless such excuse for non-attendance
shall be made as the Senate, when a quorum is convened, shall judge
sufficient: and in that case the expense shall be paid out of the
contingent fund. And this rule shall apply as well to the first
convention of the Senate, at the legal time of meeting, as to each day
of the session, after the hour is arrived to which the Senate stood
adjourned. Rule 8.]
SEC. IX.—SPEAKER.
SEC. X.—ADDRESS.
SEC. XI.—COMMITTEES.
SEC. XV.—ORDER.
Of right, the door of the House ought not to be shut, but to be kept
by porters, or Sergeants-at-Arms, assigned for that purpose. Mod.
ten. Parl., 23.
[By the rules of the Senate, on motion made and seconded to shut
the doors of the Senate on the discussion of any business which may,
in the opinion of a member, require secrecy, the President shall
direct the gallery to be cleared; and during the discussion of such
motion the doors shall remain shut. Rule 64.]
[No motion shall be deemed in order to admit any person or
persons whatsoever within the doors of the Senate chamber to
present any petition, memorial, or address, or to hear any such read.
Rule 19.]
The only case where a member has a right to insist on anything, is
where he calls for the execution of a subsisting order of the House.
Here, there having been already a resolution, any person has a right
to insist that the Speaker, or any other whose duty it is, shall carry it
into execution; and no debate or delay can be had on it. Thus any
member has a right to have the House or gallery cleared of strangers,
an order existing for that purpose; or to have the House told when
there is not a quorum present. 2 Hats., 87, 129. How far an order of
the House is binding, see Hakew., 392.
But where an order is made that any particular matter be taken up
on a particular day, there a question is to be put, when it is called for,
whether the House will now proceed to that matter? Where orders of
the day are on important or interesting matter, they ought not to be
proceeded on till an hour at which the House is usually full, [which
in Senate is at noon.]
Orders of the day may be discharged at any time, and a new one
made for a different day. 3 Grey, 48, 313.
When a session is drawing to a close, and the important bills are
all brought in, the House, in order to prevent interruption by further
unimportant bills, sometimes comes to a resolution that no new bill
be brought in, except it be sent from the other House. 3 Grey, 156.
All orders of the House determine with the session; and one taken
under such an order may, after the session is ended, be discharged
on a habeas corpus. Raym., 120; Jacob’s L. D. by Ruffhead;
Parliament, 1 Lev., 165, Pritchard’s case.
[Where the Constitution authorizes each House to determine the
rules of its proceedings, it must mean in those cases (legislative,
executive, or judiciary) submitted to them by the Constitution, or in
something relating to these, and necessary toward their execution.
But orders and resolutions are sometimes entered in the journals
having no relation to these, such as acceptances of invitations to
attend orations, take part in processions, &c. These must be
understood to be merely conventional among those who are willing
to participate in the ceremony, and are therefore, perhaps,
improperly placed among the records of the House.]
SEC. XIX.—PETITION.
SEC. XX.—MOTIONS.
SEC. XXI.—RESOLUTIONS.
SEC. XXII.—BILLS.
When a bill is first presented, the Clerk reads it at the table, and
hands it to the Speaker, who, rising, states to the House the title of
the bill; that this is the first time of reading it; and the question will
be, whether it shall be read a second time? then sitting down to give
an opening for objections. If none be made, he rises again, and puts
the question, whether it shall be read a second time? Hakew, 137,
141. A bill cannot be amended on the first reading, 6 Grey, 286; nor
is it usual for it to be opposed then, but it may be done, and rejected.
D’Ewes, 335, col. 1; 3 Hats., 198.