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ECO101H1 (575)
Lecture

# LEC1.docx

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School
University of Toronto St. George
Department
Economics
Course
ECO101H1
Professor
James Pesando
Semester
Fall

Description
ECO100 LEC1 9/12/2012 8:16:00 AM Opportunity Cost and Marginal Analysis Opportunity cost Opportunity cost of an action is what are 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 lost as well as money cost Basic Examples 1. you go to concert, which costs \$40. Your best alternative is to work for 2 hours and earn \$40. Opportunity cost =\$40+\$50=\$90 *the opportunity cost of spending \$1 is \$1 (since you could have better choice) the benefit does not affect opportunity cost. Opportunity cost would not change. However, if the benefit is less than \$50, you could never attend the concert. 2. you choose to go to a concert, which costs \$50. Your best alternative is to go for a walk, you value at \$25. Opportunity cost is =\$50+\$25=\$75 Difficult Examples 1. In 2005, you bought a bottle of wine for \$50 In 2008, you could have sold it for \$200 Today, you could sell the wine for \$75 You drink the wine today, you best alternative is to sell it. What is the opportunity cost? Opportunity cost=\$75 (what you paid in 2005 and what you sold in 2008 are not relevant) 3. you received a free concert ticket (2 hours). Your best alternative is to have a dinner at a restaurant, which you value at \$100. The cost of the meal at the restaurant is \$75. What is the opportunity cost if you choose to go to the concert? Opportunity cost is \$25 \$100 money value-\$75 cost=\$25 Measuring op
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