9/9/2009 3:03:00 PM
Wednesday 09, 2009
The Economic way of thinking
The economic problem : Scarcity requires Choices
Economic Decision Making:
Compare additional benefits with additional cost.
Ignore sunk Costs.
People Respond to incentives
Limited resources to produce goods
Economics study of how rational people make choices
Opportunity cost and
Logycal thinking in economic context
Apparently non- economic problems are economic problems. Opportunity cost
The opportunity cost of an action is what one forgoes (gives up) by not
taking the best alternative action.
The question Should I do X? should be replaced by
Should I do X or Y where Y is the most highly value alternative to X ?
Opportunity cost includes time cost as well as money cost
The opportunity cost of attending University for 1 year
If the best alternative is fulltime work at $20k
Per year, the op. cost
Forgone earnings 20000
If the best alternative is fulltime work at $40k
Per year, the op. cost
Forgone earnings 40000
Room and board $ 7000
Include in Opportunity Cost?
No, if student would have to pay for room and board if working full-time
The opportunity cost of attending a movie
If the best alternative is working at a part time job at $10 per hour, the op.
Ticket price: 12
Foregone Earnings: 20 (2h)
If the best alt. is going for a walk then the opt cost:
Ticket price: 12 Stisfaction from walk: monetary value exceeds $20 by implication
Receive Free Concert Ticket (2 hours)
Dinner at a favorite restaurant, which you value at $100 (2h)
Cost of restaurant meal is $75
3. What is opportunity cost of attending concert ?
Monetary value $100
- meal is -75
Measuring opportunity cost.
Action taken: direct costs (each dollar spent has oppt. Cost of one dollar)
Next best alternative : Dollar amount or valur assigns by you l
ess direct cost.
Should this individual operate a hot dog stand?
Revenues at $2.5 = $250
Direct Costs (per 8h daily)
Rent for stand 75
Hot dogs, buns- 75 150
Difference 100 (250-150)
Opportunity cost of individuals time
If could earn $15 per hour, opportunity cost of $120 for 8h
Since 120 exceeds 100, should not operate stand
What if opt. cost is $10 per hour? YES
The higher the Opportunity cost -> less likely to take action
Plan to attend university rather then work
Obtain high-paying job -> Opportunity cost is high
Result: may choose not to attend university
Summer jobs. High school graduates
20 000 per year
40000 per year
Equally good students
If summer jobs made permanent who is more likely to enter university in
Answer : A student
Ontario universities predict first year enrolment: 25 000
Economy enters deep recession. Employment drops. Unemployment rises.
Is actual enrolment likely to be more then 25k or less then 25k?
Answer : more
Monday, September 14, 2009