Week 02, Day 1 - Chapter 01 & 02 Overheads (revised)

Week 02, Day 1 - Chapter 01 & 02 Overheads...

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Chapter 1 – First Principles Chapter 2 – Economic Models: Trade-Offs and Trade The Economic Problem Relevant Principles: Scarcity, Decision-making, Opportunity Cost Production Possibilities Model Production Possibilities Frontier Two Characteristics Efficient vs Inefficient vs Not Feasible Production Combinations Economic Growth Comparative Advantage and Gains from Trade Positive Vs Normative Economics The Economic Problem At the heart of economics is a problem: Resources are scarce (Basic principle #1) and are unable to produce everything that people desire. Scarcity forces individuals to make choices. While some of these choices are “either-or” decisions, others involve choices of “how much”, decisions at the margin (Basic principle #3). Such decisions involve examining the benefits and costs of doing a little more or a little less of some activity. Ex: Time is limited. How many hours do I spend on studying Economics, studying other courses, working, sleeping, etc? Income is limited. How much income do I spend on food, housing, clothing, entertainment, etc? People usually exploit opportunities to make themselves better off (Basic principle #4). If the benefits of taking an action outweigh the costs of taking that action, then an individual is likely to take that action. The benefits and costs in decision-making appear in both monetary and non- monetary terms. When economists examine the costs of decisions, they look beyond just the direct or explicit cost (the out-of-pocket cost). The real cost of something is what you must give up to get it (Basic principle #2); it is known as the opportunity cost (the best alternative).
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Q: Jane is a student at Langara College. She is thinking about taking an Economics class during the Summer term. She would have to pay $236 for the course, $26 for student fees, and $100 for textbooks. Jane would also need to cut back her work hours to take the course. As a result, her work income is expected to fall from $5,600 to $4,480. What is Jane’s direct cost and what is her opportunity cost of taking the class? A: Direct cost = tuition + student fees + textbooks = $236 + $26 + $100 = $362 Opportunity cost = lost spending (due to spending on tuition, student fee, textbooks and due to lost income from cutting back work hours) = $236 + $26 + $100 + $1,120 = $1,482 Q: Suppose Jane will also spend $3,000 on rent, a living expense, over the next four months. Does Jane’s opportunity cost of taking the class change? A: No, if Jane must spend $3,000 on rent regardless of whether she takes the class or not. However, if Jane only incurs the $3,000 in rent if she chooses to take the class then it is added to her opportunity cost. This applies to other costs such as transportation, food, etc. Q: Would taking the class make Jane better off? A: We don’t know. We’ve only examined the cost of her decision. We have no information on her benefit of taking the class. Indeed, some individuals such as Tiger Woods have been better off not pursuing post-secondary education at all (or at least at certain times in their lives).
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