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ECO100 Sept. 10th.odt

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James Pesando

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The Economic Way of Thinking 1. Economic Problem: Scarcity requires Choices 2. Economic Decision – making: 2.1 Opportunity Cost What one forgoes (gives up) by not taking the best alternative action 2.2 MarginalAnalysis CompareAdditional Benefits withAdditional Costs Ignore Sunk Costs Scarcity: Individual: limited budget limited time Scoiety: Limited resources to produce goods Choices: Economics: Study of how rational people make choice Opportunity Cost and MarginalAnalysis ~ Logical thinking in economic context Opportunity Cost: The Opportunity cost of an action is what one forgoes by not taking the best alternative action. Insights: 1. the question “should I do X?” should be replaced by “should I do X orYwhereYis the most highly valued alternative to X?” 2. Opportunity Cost includes time cost as well as money cost Examples 1. you choose to go to a concert, which costs $50. your next best alternative is to work for 2 hours and earn $40. OC = $50 + $40 = $90 Remember: The opportunity cost of spending a $1 is $1 (since you could spend on other goods or services) 2. you choose to go to a concert, which costs $50, your next best alternative is to go for a walk, which you value at $25. Opportunity Cost = $50 + $25 = $75 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 see the wine for $75. If you drink the wine today, and the next best alternative is to sell it, what is the opportunity cost? 0 (you already paid for it) $50 $75 (CORRECT) $200 (What you paid in 2005 or what you could have sold the wine for in 2008 are NOT relevant) Example 1. receive Free concert ticket (2 hours) 2. next best alternative Dinner at favourtite rest
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