MGEA02H3 Lecture Notes - Lecture 1: Opportunity Cost, Utility, Factors Of Production
12 May 2018
School
Department
Course
Professor
MGEA02 – Topic 1 1
MGEA02 –
Introduction to Microeconomics:
A Mathematical Approach
Topic #1 – Part 2
FALL 2016
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MGEA02 – Topic 1 2
Example 1: Your mother made you lunch, so you have an apple and a banana.
She paid 10 cents for the apple and 20 cents for the banana. Suppose, I don’t
have any lunch, and I’m hungry. I’d like to buy a piece of fruit from you.
How much should you charge me?
• An obvious, but wrong, answer is 10 cents for the apple and 20 cents for the
banana.
It is because the cost of giving up that piece of fruit depends on value of
the alternative foregone (in this case, eating that piece of fruit yourself).
Therefore, the amount you charge me should depend on the amount of joy
or the level of satisfaction you will get from eating that piece of fruit
yourself (i.e., the value of the alternative).
• Suppose the level of satisfaction of eating the apple is worth 50 cents. How
much should you charge me for an apple?
Example 2: What is the opportunity cost of attending university?
→ Hint: What do you “give up” when you go to university?
Should you include your apartment rental, food and entertainment costs as part
of the opportunity cost of going to university?
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MGEA02 – Topic 1 3
Example 3: What is the opportunity cost of getting married?
Example 4: What is the opportunity cost of taking a month-long vacation?
→ Does it depend on when you take it?
Does opportunity cost really matter? Do we make decisions according to
opportunity cost?
→ Why are you young?
→ Why do “adults” take evening or weekend courses?
→ Why do senior citizens, teachers & university professors take holidays?
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MGEA02H3 Full Course Notes
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Document Summary
Example 1: your mother made you lunch, so you have an apple and a banana. She paid 10 cents for the apple and 20 cents for the banana. Suppose, i don"t have any lunch, and i"m hungry. I"d like to buy a piece of fruit from you. How much should you charge me: an obvious, but wrong, answer is 10 cents for the apple and 20 cents for the banana. It is because the cost of giving up that piece of fruit depends on value of the alternative foregone (in this case, eating that piece of fruit yourself). When we make any decisions, we take the followings into account: should only take actions that are such that total benefit (tb) of the action exceeds the total cost (tc) of the action. Must include all opportunity costs (both explicit and implicit costs). In a market economy, individuals make choices (about demand and supply) and then markets bring those individual decisions together.
