Opportunity Cost
-the value, in terms of the objectives, of the next best alternatives
EXAMPLE-inherit a parking lot in San Francisco
-brought in $400,000 in revenue
-$50,000 out-of-pocket costs
-$350,000 profit
-could have sold lot for $10 million
-invested $10 million at a 5% rate
-annual income off interest would be $500,000
-this is $150,000 more than the parking lot would profit/year
-$500,000=opportunity cost, next best alternative value
Exchange
The trading of goods, services, and factors of production among the key
players in an economy
Economics- the study of the allocation of scarce resources through the
process of exchange
Summary
Economic problem has three part structure consisting of objectives,
alternatives, and constraints
Law of Scarcity says that people are constrained in trying to solve their
economic problems. There are never enough resources to meet their
objectives
Short definition of economics- study of how to best allocate scarce resources
Three key players of an economy: individual, business firm, government
Individuals have the role of consuming goods and services and providing
factors of production to business firms
Business firms have the role of buying factors of production and producing
goods and services for sale
Government agencies act as both consumers and producers in a market
economy
Principle of Interdependence states that the consequences of economic
decisions spread beyond the immediate concern of the decisions. A decision
to choose one thing is a decision not to choose something else
Because economic decisions are interdependent, the true economic cost is
the opportunity cost. The cost of making decision A is the value in terms of
the objectives of the next best alternative B
Individuals, business firms, and governments attempt to solve their
economic problems through the process of exchange
Expanded definition of economics- the study of the allocation of scarce
resources through the process of exchange
Chapter 2-Solving the Economic Problem
Solving the Economic Problem: Efficiency and Equity
Economic analysis rests on the fundamental assumption that people are always
striving to find the best possible solutions to their own economic problems
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