ECO100Y1-Pesando-Notes edited by Eva Wu
Topic 1 - The Economic Way of Thinking
(Week One Sep 13th t Sep 17th)
Sep 13th t Scarcity & Opportunity Cost
Scarcity: Individual: limited budget; limited time
Society: limited resources to produce goods
Economics: the study of how rational people make choices;
the study of how society managers its scarce resources;
Scarcity leads to Choices leads to Economics (the study of making choices).
1. Opportunity Cost:
what one forgoes by not taking the best next alternative;
whatever must be given up to obtain some item;
e.g.1. What is the OC of attending University for one year ($8,000) if the next best alternative is working
full-time at $20,000/yr?
Opportunity Cost = Tuitions/Books + Forgone Earnings = $8000+$20,000
The Opportunity Cost of spending $1 is $1 (you could use the same dollar to buy other goods or services);
e.g.2 What is the OC of attending a 2-hr movie (ticket $12) if:
a). the next best alternative is working a P/T job at $10/hr
OC=Ticket Price + Forgone Earnings = $12 + $20 = $32;
b). the next best alternative is going for a walk
OC=Ticket Price + the Satisfaction from the walk (no monetary value)
(but the satisfaction from the walk apparently exceeds $20.00, by implication);
e.g.3 someone operates a hotdog stand with:
a. Revenue from an 8-hr day: 100 hotdogs x $2.5/hotdog = $250;
b. Cost of an 8-hr day: Rent-$75; Profit = $100
buns, hotdogs = $25; Total Cost = $100;
NOW should one continues operating the hotdog stand if:
a). The next best alternative is working at $15/hr?
No, $15 X 8 = $120 greater than $100;
b). The next best alternative is working at $10/hr?
Yes, $10 X 8 = $80 less than $100.
c).Why do few medical doctors operate hot dog stands?
Since medical doctors are the highest-earning professions in Canada, the opportunity cost of their time is
too high for them operate hotdog stands.