Economics: Week One
Limited resources to produce goods
Scarcity forces us to make choices
Economics is the study of how rational people make choices
Rational (Economic) Decision Making
The opportunity cost of an action is what one forgoes (gives up) by not taking the best alternative action
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
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
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
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
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.
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.
What is the opportunity cost for the students themselves? University vs. Employment.
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.
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
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