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ECO100Y: I

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James Pesando

Economics: Week One Scarcity Individual Limited budget/time Society Limited resources to produce goods **FUNDAMENTAL PROBLEM Scarcity forces us to make choices Choices Economics is the study of how rational people make choices Rational (Economic) Decision Making Opportunity Cost The opportunity cost of an action is what one forgoes (gives up) by not taking the best alternative action Insights 1. The question “Should I X?” should be replaced by Should I do X or Y where Y is the most highly valued alternative to X 2. Opportunity cost includes time cost as well as money cost Example 1 You choose to attend a concert, which costs $50. What is opportunity cost? To answer: must identify next best alternative If your next best alternative is to work for 2 hours and earn $80, opportunity cost = 50 + 80 = 130 Remember The opportunity cost of spending $1 is$1 (since you could spend this dollar on other goods or services) Example 2 Next best alternative to movie = walking which you value as 25. Opportunity cost = 25+ 50 = 75 Example 3 Bought wine in 2005 for 50. In 2008, could have sold for 200. Now valued at 75. Drink vs. Sell? 0, 50, 75, 200. 75 Application Is this individual capable of running a hot dog stand? Revenue (8 hour day) 2.5/dog = 250 for 100. *****you need direct/variable etc. costs. NEED ALL THE INFORMATION. Question In 2013, the US economy recovers, and unemployment falls. Will college enrollment in the US in September 2013 compared to September 2012: Fall, increase, not change. Fall. Insight What is the opportunity cost for the students themselves? University vs. Employment. Opportunity Cost 1. If the next best alternative is fulltime work at $30 000 per year Tuition/books 15 000 Foregone earnings 30 000 Total 45 000 2. If the next best alternative is to work fulltime, but no work is available (due to high unemployment) Tuition/books 15 000 Foregone earnings Nil Total 15 000 Employment FALLS in September 2013 For many, employment is the next best alternative to attending college, so opportunity cost of attending college has increased Insight If the opportunity cost of taking an action is high, the action is less likely to be taken You decide to attend a concert, which costs 200. You value the concert at 400. Your next best alternative is to go to a restaurant which you value at $150 and which costs $100. Answer: 200 + (150-100) = 250 How does the opportunity cost change if the satisfaction you get from going to the concert increases from 400  500? Does not change. Opportunity cost does not depend on the value to you of the action taken. Example 1 Benefit of attending university for one year Individual A: 275 000 B: 150 000 C: 30 000 If opportunity cost increases from 15 000 (Sept 2012) to 45 000 (Sept 2013), Individual C will choose NOT to attend university Observations i. Opportunity cost is the SAME for A, B and C ii. Because of individuals like C, enrollment declined in Sept 2013 Measuring Opportunity Cost Action Taken plus Next Best Alternative Direct Costs (each dollar spent has Dollar amount or value assigned by opportunity cost of one dollar) you Rational Decision Making PTII Undertake activity if marginal (a
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