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ECO100 - SEP 10

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University of Toronto St. George
James Pesando

Wednesday: Assignment #1 Fundamental problem of economics: Problem of Scarcity (how people make decisions) -Individual : Limited budget, limited time - Society: limited resources to produce goods( not possible to produce an infinite amount) Because of scarcity... We must make choices Study of Economics: how rational people make choices Opportunity Cost and Marginal analysis logical thinking in economic context Opportunity Cost The opportunity cost of an action is what one forgoes by not taking the best alternative action. ( What we would’ve done otherwise?) - 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 1. Examples #1 Concert which costs 50. Your next best alternative is to work for 2 hours and earn 40. - What is the opportunity cost to go to the concert? - Opportunity cost = 50 +40 = 90 Follow up question: What about the benefit of going to the concert- does this benefit affect opportunity cost? ANSWER: no Insight: How would the opportunity cost change fit eh benefit to you of attending the concert is : 100? 200? 10,000? opportunity cost is the cost you forgone, not the benefit you receive (However, If the benefit is less than 50, you would never attend the concert) The opportunity cost of spending 1 is 1 (since you could spend on other goods or services) #2 You choose to go to a concert, 50. Your next best alternative is to go for a walk, which you value at 25. - Going to the concert: Opportunity cost: 50+25= 75 2. Difficult Examples #1 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 opportunity cost? a. 0 (you already paid for it) b. 50 c.75 ( What you paid in 2005 or what you could have sold the wine in 2008 are NOT relevant) d.200 #2 1. Receive Fr
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