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Lecture 1 on The Economic Way of Thinking

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James Pesando

Description or Username: pesando Password: windsor if there are any problems, please contact [email protected] Scarcity: Individual Limited budget Limited time Society Limited resources to produce goods Choices Economics Study of how rational people make choices Rational (economic) Decision Making Two key building blocks: 1. Opportunity Cost 2. Marginal Analysis 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 do 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. (class examples emphasize this fact.) Examples #1 You choose to attend a concert, which costs $50. What is opp. cost? To answer: Must identify next best alternative If your next best alternative is to work for 2 hours and earn $80, opp. cost = $50 + $80 = $130 *The opp. cost of spending $1 is $1 (since you could spend on other goods or services) Example 2 You choose to go to a concert, which cost $50. Your next best alternative is to go for a walk, which you value at $25. Opp. cost = $50 + $25 = $75 Q: In 2005, you purchased a bottle of rare wine for $50. In 2008, you could have sold the wine for $200. Today, you could sell the wine for $75. If you drink the wine today, and the next best alternative is to sell it, what is the opp. cost? 0 (you already paid for it ) $50 (paid) $75 (sold now) $200 (sold 2008)
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