1-Econ 211 Handout 1 Fall 2009

1-Econ 211 Handout 1 Fall 2009 - Econ 211 Fall 2009 Handout...

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Handout 1 Spring 2009 Econ 211 Fall 2009 Handout 1 I. The necessity of choice Someone once told me that there were three things you had to know to be an economist: 1. Marginal not average; 2. Sunk costs are sunk costs; 3. There is no such thing as a free lunch. In this lecture we are going to explore the implications of the statement that there is no such thing as a free lunch. How are scare commodities and goods allocated? Some goods are allocated by markets. This is going to be the focus of most of this course. Examples are: 1. Bubble gum; 2. Oil; 3. Food; 4. Automobiles; 5. Admission to ski resorts. Other goods are allocated by a mixture of markets and institutions. Examples are: 1. Admissions to selective universities; 2. Season tickets to Ohio State University football games; 3. Prescription drugs, 4. Membership in private clubs; 5. Right to emit carbon dioxide. Some goods are view as inappropriate for markets. Examples: 1. Human organs; 2. Sex;
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Handout 1 Fall 2009 2 3. Invitations to Rex Ball in Marti Gras; 4. Votes in U.S. Congress; 5. A place in a queue (In the United States). Although one can find frivolous goods in all three categories, many of the more important areas of controversy and debate involve goods where markets and institutions are part of the rationing mechanism. Examples: Should health care be rationed by income; should the be differential pricing for prescription drugs, and should the citizens of China or India have the same right to emit carbon dioxide as the citizens of the United States? One good whose scarcity is independent of wealth, institutions or circumstance is time. Paris Hilton or even Warren Buffett may have more money than they can spend, but even they can not evade the constraint that there are only 24 hours a day. This is also true of Rice students. If you do not sleep, you have 24 hours in a day which you can spend either working or having fun. This constraint is illustrated in Figure 1 below.
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Handout 1 Fall 2009 3 6 12 18 24 6 12 18 24 FUN WORK Figure 1 We can write this constraint as an equation (1) W + F = 24 or (2) F = ! W + 24 where W is hours work and F is hours having fun. Every hour you spend having fun means that you must give up a one hour of work. The opportunity cost of one hour of fun is one hour of work. Note that the slope of the line in figure 1 is -1 and dF dW = ! 1 . Now suppose that you still don’t sleep but you have a job at which you can earn $10 an hour. You have a choice of consuming either time or money. (If you want to be picky about it, you would consume the good things that money can buy.) You have a choice of not working and having 24 hours free time or working 24 hours a day and
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4 earning $240. If you increase your consumption of fun by one hour, you have to give up $10. Your choice set is illustrated in Figure 2 below.
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1-Econ 211 Handout 1 Fall 2009 - Econ 211 Fall 2009 Handout...

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