the economic way of thinking
1. opportunity cost
2. marginal cost
limited resources to produce goods
Study of how rational people make choices
Two key building blocks:
2, marginal analysis
The opportunity cost of an action is what one forgoes by not taking the best alternative action. E quesion
1, the question should I do x should be replaced by
Should I do x or y where y is the must highly valued alternative to x
2, opportunity cost includes time cost as well as money cost
you choose to attend a concert, which costs $50, what is opportunity cost?
To answer: must identify next best alternative
If you next best alternative is to work for 2 hours and earn $80, opportunity cost= $50+$80=$130
The opportunity cost of spending $1 is $1(since you could spend on other goods or services)
you choose to go to a concert, which costs $50.
You next best alternative is to go for a walk, which you value at $25
In 2005, you purchased a bottle of rare wine for $50.
In 2008, you could have sold the wine for $200.
Today, you could sell the wine for $75.
If you drink the wine today, and the next best alternative is to sell it, what is the opportunity cost?
$200 E quesion
(what you paid in 2005 or what you could have sold the wine for in 2008 are not relevant)
Should this individual operate a hot dog stand?