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Topic 1 - The Economic Way of Thinking th th (Week One Sep 13 – Sep 17 ) th Sep 13 – Scarcity & Opportunity Cost Scarcity: Individual: limited budget; limited time Society: limited resources to produce goods Economics: the study of how rational people make choices; the study of how society managers its scarce resources; Scarcity leads to Choices leads to Economics (the study of making choices). 1. Opportunity Cost: what one forgoes by not taking the best next alternative; whatever must be given up to obtain some item; Insights: a. 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” b. Includes “Time Cost” as well as money cost e.g.1. What is the OC of attending University for one year ($8,000) if the next best alternative is working full-time at $20,000/yr? Opportunity Cost = Tuitions/Books + Forgone Earnings = $8000+$20,000 The Opportunity Cost of spending $1 is $1 (you could use the same dollar to buy other goods or services); e.g.2 What is the OC of attending a 2-hr movie (ticket $12) if: a). the next best alternative is working a P/T job at $10/hr OC=Ticket Price + Forgone Earnings = $12 + $20 = $32; b). the next best alternative is going for a walk OC=Ticket Price + the Satisfaction from the walk (no monetary value) (but the satisfaction from the walk apparently exceeds $20.00, by implication); e.g.3 someone operates a hotdog stand with: a. Revenue from an 8-hr day: 100 hotdogs x $2.5/hotdog = $250; b. Cost of an 8-hr day: Rent-$75; Profit = $100 buns, hotdogs = $25; Total Cost = $100; NOW should one continues operating the hotdog stand if: a). The next best alternative is working at $15/hr? No, $15 X 8 = $120 greater than $100; b). The next best alternative is working at $10/hr? Yes, $10 X 8 = $80 less than $100. c).Why do few medical doctors operate hot dog stands? Since medical doctors are the highest-earning professions in Canada, the opportunity cost of their time is too high for them operate hotdog stands. ECO100Y1-Pesando-Notes edited by Eva Wu Application 1: Enrollment Rate In Dec 1990, an Ontario University predicts its first year enrollment to be 25,000; In spring 1991, the economy enters a deep recession, and employment drops greatly; In Sep 1991, What is the actual enrollment going to be? Greater or Less than 25,000? The OC of attending university (e.g.1) is Tuition/books + Forgone Earnings. In this case, the unemployment increased greatly, prospective students are much less likely to get a job as they used to expect. Their Forgone earning decreases greatly. The OC as a whole decreases greatly. Therefore, there is a huge increase in the actual enrollment. e.g.4 a). What is the OC of going to a free concert (2-hr) if the next best alternative is dinner at your favorite restaurant? (the dinner is valued by you at $100; dinner cost $75;) 0; $25; $100; $175 You receive a satisfaction from the dinner which is valued by you at $100. For the dinner you spend $75. Therefore if you do not go to the dinner, you are giving up $25 in value ($100-$75). And the concert is for free, so there is no direct cost. Therefore the OC is $25. b). What if the meal is for free? The OC increases to $100 (your satisfaction for the dinner is $100 with no cost;) Always in mind: “WHAT DID YOU GIVE UP?” e.g.5. a). You decided to go to a concert which you value at $400. The concert costs you $200. Your next best choice is having dinner at your favorite restaurant which you value at $150 and costs you $100. What is the OC of going to the concert? OC= $200+($150-$100) = $250 b).What if the value of the Concert goes up? The OC is unchanged. The value of the concert DOES NOT impact OC, but rather impact your decision of going to the concert. If the value you assign to the concert is greater than the cost, you make the decision of going to the concert, and vice versa. Once the decision is made, the value of the concert no longer impacts on the OC; only the direct cost of the concert, the value and cost of your next best choice will impact on the OC, because THAT’S WHAT YOU GIVE UP FOR the concert. ECO100Y1-Pesando-Notes edited by Eva Wu Measuring OC Next BestAlternative (2 Choice) st Action Taken (1 Choice) + ($amount or value assigned by you) Direct Cost (because each $1 spent has an OC of $1) _ Direct Cost of that alternative st Why do we not include satisfaction of the 1 choice? It does not impact on the OC but rather on the decision-making at the first place. We have the following: 1 Choice cost; 1 choice satisfaction; 2 choice cost 2 choice satisfaction Our objective is to obtain the 1 choice satisfaction. To obtain the 1 choice satisfaction, we have to give up 1 choice cost, 2 choice satisfaction. nd nd But 2 choice satisfaction comes with a 2 choice cost. So the OC of the 1 choice satisfaction will be: 1 choice cost + (2 choice satisfaction – 2 choice cost) e.g.6. a). What is the OC of a dinner ($100) if your next best alternative is taking a walk in a park? (the walk is valued at $50; taxi to and from the park is $20); OC = $100 + ($50-20) = $130 b). What if the cost of the meal is $300? Then OC = $300 + ($50-20) = $330. OC increases. e.g.7. You bought a wine at $20. You have a choice of drinking the wine or selling the wine at the current market price of $100. What is your OC of drinking the wine? OC = nil + $100 = $100 or, OC= $20 + ($100-$20) = $100 ($20 can be viewed as a sunk cost ;) Application 2 Gun Registry The federal government of Canada regulates guns for the purpose of saving lives. For the federal government, the cost of gun registry every year is $ 1 billion. Policy Debate goes as follows: Pros: the gun registry sa
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