1. Opportunity Cost
In economics, the principle ofopportunity costis that the real cost ofsomething is what you have to
give up to get it. All costs are opportunity costs,not just financial ones. For example, the
opportunity cost oftaking a certain course in college is another class you could have potentially
taken.
The Equi-MarginalPrinciple
The equi-marginal principle states that it is best to conduct economic activity at the level where
marginal cost equals,or is lower than, the marginal benefit. In economics, the word marginal
means incremental. In marginal analysis, costs and benefits are weighed on a marginal basis. This
could be per unit, or per 100 units, or whatever quantity deemed necessary for the analysis.
Diminishing Returns
With the principle of marginal diminishing returns, if one input ofproduction is increased while
keeping the others fixed, overall production output will increase, but the rate ofthis increase will
incrementally decrease.A farmer with a set number ofacres in production will find that a certain
number of workers will yield the highest production rate,and thus the highest returns. Ifmore
workers are hired then the proportion ofincome from overall production will be less than the
increased cost ofthe newworkers.
The Spillover Principle
This principle states that at times, decision makers will not get all ofthe benefits or bear all the
costs oftheir decisions.An example ofthis is that runoff from a manufacturing plant can negatively
affect those living downstream. On the flip side, the existence ofa product can have unforeseen and
unintended benefits in society beyond the financial benefit to the manufacturer.
The Reality Principle
The idea behind the reality principle is that purchasing power and income is what really matters to
people,rather than face value ofmoney and goods. This principle is about the real versus the
nominal value ofsomething. Nominal value is the monetary value ofsomething. For example, a car
is $10,000. Real value is the value ofthat product relative to other goods.That same $10,000 could
also pay rent for the year.