ECON-2110 Lecture Notes - Lecture 4: Historical Cost, Opportunity Cost, Marginal Cost

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26 Dec 2015
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ECON 2110: Intro to Microeconomics August 31
Topic 2: Essential Concepts (cont.)
2. Opportunity Cost (concept #2)
*** Opportunity Cost (opportunity sacrificed) = Marginal Cost
Trade $5 bill for $20 bill --- both just paper!!
Opportunity to exchange $20 bill for things we like would be lost
We value money because of what it represents
What we give up = COST
- Because everything is scarce, life consists of tradeoffs
Opportunity cost = next best alternative
** Historical cost is irrelevant, only opportunity costs matter
(September 2 – continuing from previous lecture)
True Cost = opportunity sacrificed
Example: Which are costs of college?
Tuition yes
Room&Board no
Foregone earnings (not entering workforce) yes
*** remember to ignore the sunk costs ***
Opportunity cost = marginal cost and vice versa
- Affected by action @ the margin
- If costs can’t be affected, they are SUNK and are not relevant in the
present, but they do affect the future decisions
Topic 2 – Part 3 September 9
3. Gains from trade and comparative advantage
A. Gains from trade
- People trade b/c they expect to be made better off (Marginal Principle)
What do the seller/consumer value more?
- Trade moves goods from low value to higher value
- That difference in values = GAINS FROM TRADE
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