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Opportunity costs

Opportunity costs. Scarcity. Economics is the study of how individuals and economies deal with the fundamental problem of scarcity. As a result of scarcity, individuals and societies must make choices among competing alternatives. Opportunity Cost.

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Opportunity costs

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  1. Opportunity costs

  2. Scarcity • Economics is the study of how individuals and economies deal with the fundamental problem of scarcity. • As a result of scarcity, individuals and societies must make choices among competing alternatives.

  3. Opportunity Cost • The opportunity cost of any alternative is defined as the cost of not selecting the "next-best" alternative. • Example: Suppose you choose to travel around Europe for a year after high school graduation, what is the opportunity cost of this trip?

  4. Opportunity Cost • Opportunity cost of your Europe travels is no income for a year and/or no college for a year. Poetry and Economics “There is a famous poem by Robert Frost that states, “Two roads diverged in a yellow wood, /And sorry I could not travel both / And be one traveler…” In economic terms, Frost is lamenting the fact that there is an opportunity cost associated with choosing one road over the other. You can use this poem to help remind you that any decision, even choosing between two paths, includes an opportunity cost.

  5. Can’t Have it All! • Most economic situations can be discussed using the ideas of scarcity and opportunity cost. It doesn’t matter if the subject is the nation (like the United States) or a person, the basic decision-making processes center on deciding how to allocate the scarce resources at hand.

  6. Example II • The opportunity cost of college attendance includes: • the cost of tuition, books, and supplies, • foregone income (this is usually the largest cost associated with college attendance)

  7. Example III: • Opportunity cost of attending a movie: • opportunity cost of tickets • opportunity cost of time

  8. Marginal analysis • Marginal benefit = additional benefit resulting from a one-unit increase in the level of an activity • Marginal cost = additional cost associated with one-unit increase in the level of an activity

  9. Marginal analysis • MB > MC  expand the activity • MB < MC  contract the activity • optimal level of activity: MB = MC (Net benefit is maximized at this point)

  10. Marginal benefit • MB generally declines as the level of an activity rises. • Consider the MB of time spent studying:

  11. Marginal cost • For most activities, marginal cost rises as the level of the activity increases.

  12. Optimal study time • The optimal amount of study time occurs at the point at which MB = MC

  13. Production Possibilities Curve Example: Study Time • 4 hours left to study for two exams: economics and calculus • Output = grades on each exam

  14. Alternative uses of time

  15. Commodity-specific technological change

  16. Specialization and trade • Adam Smith – economic growth is caused by increased specialization and division of labor.

  17. Gains from specialization and division of labor • specialization in areas that match the skills and talents of workers • “learning by doing” – increase in productivity from task repetition • less time lost while switching from task to task

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