Ch04 - Supply - Chapter4 OpportunityCostandtheSupplyof...

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1 Chapter 4 Opportunity Cost and the Supply of  Goods
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2 Introduction The theory of supply , like demand theory,  assumes that decision makers face alternatives  and choices. Choices based on comparing expected benefits and  costs The incentive to produce and supply scarce  goods is shaped by opportunity cost and the  market prices that reflect and inform us of  those costs.
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3 Question Why do poor people travel between cities by bus,  while wealthy people are more likely to travel by  air? Answer The higher one’s income, the higher the opportunity  cost of time.
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4 Question Why is it so much harder to find a teenage  babysitter in a wealthy residential area than in a  low-income area? Answer Wealthy teenagers get generous allowances from  their families, so they value leisure time more than  the extra money they could earn by babysitting.
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5 Costs are Tied to Actions, Not Things Costs are always tied to actions, decisions and  choices. We must first distinguish the cost of obtaining  a good  or service from the cost of providing  one . Actions can entail different costs for different  people.
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6 The Irrelevance of “Sunk Cost” With cost, the most common error is to confuse  cost previously incurred  with marginal cost . The proper stance for making cost calculations  is to  not  look at the past, for the past is filled  with sunk cost , irretrievable cost.
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The Irrelevance of “Sunk Cost” Exercise The company that you manage has invested $5  million in developing a new product, but the  development is not quite finished. It is discovered that the introduction of new  products by your competitor has reduced the  expected sales of your new product from 10  million to $3 million. If it would cost $1 million to finish 
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This note was uploaded on 10/15/2009 for the course ECONOMICS UGC251QD/ taught by Professor Fredku during the Spring '09 term at CUHK.

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Ch04 - Supply - Chapter4 OpportunityCostandtheSupplyof...

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