Lecture Notes chapter 2

Lecture Notes chapter 2 - Opportunity Cost Chapter 2:...

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1 1 Chapter 2: Scarcity, Choice and Economic Systems 2 Opportunity Cost • How do we decide about the cost of a good/service? – Money? – Economist: Money is a part of its cost – Opportunity Cost: most accurate and complete concept of cost • The opportunity cost of any choice is what we must forgo when we make that choice – that is: the money (or time) could have been used for other things that we value. - In a different way, true cost of any choice we make - Everything we actually sacrifice in making the choice. 3 Opportunity Cost and Individuals • The opportunity cost of a choice is the best among the available alternatives to that choice (ex: Reading two chapters from textbook) • Many choices: Large part of the money paid is opportunity cost • Direct money cost of a choice may only be a part of opportunity cost of that particular choice 4 Continued… Opportunity cost of a choice includes both explicit costs and implicit costs – Explicit cost—dollars actually paid out for a choice – Implicit cost—value of something sacrificed when no direct payment is made ( what is the biggest sacrifice in this category?) Let us calculate the opportunity cost – we will discuss different problems - a) Opportunity cost of attending first year of college b) Opportunity cost of playing computer games whole weekend c) Opportunity cost of seeing Mission Impossible III for a paid worker
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5 Opportunity Cost and Society • All production carries an opportunity cost –To produce more of one thing • Must shift resources away from producing something else • Society has limited resources 6 Production Possibilities Frontiers (PPF) • Curve showing all combinations of two goods that can be produced with resources and technology available • Society’s choices are limited to points on or inside the PPF – Points inside: Inefficient production, recession – Points outside: Not attainable (might become attainable through economic growth) – Optimum way: Being on the PPF • Consider two goods: wheat and tanks 7 Production Possibilities Frontiers Figure 1 The Production Possibilities Frontier Number of Tanks per Year Bushels of Wheat per Year 1000 2000 3000 4000 5000 1,000,000 950,000 850,000 700,000 400,000 B A C D E F W all resources are used for wheat Moving from point A to point B requires shifting resources out of wheat and into tanks all resources are used for tanks 8 Production Possibilities Frontiers • Suppose we are at point A: What is the opportunity cost of producing 1,000 more tanks? • Suppose we are at point B: What is the opportunity cost of producing another 1,000 tanks?. ..etc. • Look at the vertical distance, the opportunity cost is …. .? • What’ s the opportunity cost of the last 1,000
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This note was uploaded on 03/27/2008 for the course ECON 102 taught by Professor Singerman during the Spring '08 term at Iowa State.

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Lecture Notes chapter 2 - Opportunity Cost Chapter 2:...

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