ECON 208 Lecture Notes - Lecture 1: Sunk Costs, Opportunity Cost
6 Sep 2018
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ECON208 Lecture 1 - Introduction to Microeconomics
Tues. Sept. 4th, 2018
Taxi Permits and UBER - Opportunity Costs
• There is a fixed number of licenses for taxi drivers
• Taxi Cab permit value in year 2000 was $200,000, now it's $100,000, they've lost
wealth to UBER
• 25 - 30 years ago, Montreal limited the number of taxi cab licenses. Now, taxi drivers
are making little income because the demand for the licenses increased and the
permit price became high. 10 years ago, the taxi drivers went back and asked
again, but this does not work because the prices went up. Taxi drivers have to rent
the taxi cars and it often takes them 6 hours of labour before they make an income
• Should we have UBER or not? Some cities ban it for the sake of the taxi drivers, which
is essentially taking money from the consumers and give it to the taxi drivers
• Now, it is worth holding onto a permit because it is worth a lot to sell but can be hard
to make a profit using
• Opportunity costs are very important because they influence behavior
B. Tickets to Concerts or Parties - Sunk Costs
• Professor Dickinson bought tickets for the concert and was invited to a party. He
preferred to go to the party but already spent money on the concert. It makes
sense to go to the party because he is losing the concert ticket money either
way. (it was too late to sell the concert tickets)
• The ticket is called a sunk cost because you can't get it back
• Sunk costs should not affect your behavior because you already paid for it
C. Back-to-Back Airline Tickets - Elasticity and Consumer Sensitivity
• If you did a round-trip and your return trip was during the weekend they would charge
you less
• The business people's sensitivity to price is lower because they'll go anyway for the
sake of business
• On the weekends, there's a different type of consumer, like people just going to meet
their relatives. Those consumers are substantially more sensitive to the price. So
the weekend price was much lower
• The sensitivity is called elasticity (price differentiation and consumer sensitivity)
• A man bought several sets of weekend tickets. The man went during the week but
used the weekend tickets back to back so that he could make his trips during the
week.
• The airline figured it out and stopped him. The guy lost the appeal. Again, this is taking
money from that person and gave it to the airline.
• You can't do that now, however, you can save on advanced ticketing.
• Another example: Banks invest in students by giving them lower fees so that they will
stay with them in the future
Document Summary
Now, taxi drivers are making little income because the demand for the licenses increased and the permit price became high. 10 years ago, the taxi drivers went back and asked again, but this does not work because the prices went up. He preferred to go to the party but already spent money on the concert. Those consumers are substantially more sensitive to the price. So the weekend price was much lower: the sensitivity is called elasticity (price differentiation and consumer sensitivity, a man bought several sets of weekend tickets. The man went during the week but used the weekend tickets back to back so that he could make his trips during the week: the airline figured it out and stopped him. The fundamental nature of economics: the use of scarce resources to satisfy virtually unlimited wants, a scarce resource means it has an opportunity cost. What does not have an opportunity cost: a good is something beneficial.
