3 (30) - CHAPTER1 FIRST PRINCIPLES 7 hours in a week how...

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: CHAPTER1 FIRST PRINCIPLES 7 hours in a week: how many of those hours will they spend going to supermarkets to get lower prices, rather than saving time by shopping at convenience stores? The answer is the sum of individual decisions: each of the millions of individuals in the economy makes his or her own choice about where to shop. and the overall choice is simply the sum of those individual decisions. But for various reasons. there are some decisions that a society decides are best not left to individual choice. For example, the authors live in an area that until recently was mainly farmland but is now being rapidly built up. Most local residents feel that the community would be a more pleasant place to live if some of the land were left undeveloped. But no individual has an incentive to keep his or her land as open space. rather than sell it to a developer. So a trend has emerged in many communities across the United States of local governments purchasing undeveloped land and preserving it as open space. We'll see in later chapters why decisions about how to use scarce resources are often best left to individuals but sometimes should be made at a higher. community-wide. level. The Real Cost of Something Is What You Must Give Up to Get It It is the last term before you graduate, and your class schedule allows you to take only one elective. There are two, however, that you would really like to take: History of Jazz and Beginning Tennis. Suppose you decide to take the History of Jazz course. What's the cost of that deci- sion? It is the fact that you can't take Beginning Tennis. your next best alternative choice. Economists call that kind of cost—what you must give up in order to get an item you want—the opportunity cost of that item. So the opportunity cost of taking the History of Jazz class is the enjoyment you would have derived from the Beginning Tennis class. The concept of opportunity cost is crucial to understanding individual choice because, in the end. all costs are opportunity costs. That's because every choice you make means forgoing some other alternative. Sometimes critics claim that economists are concerned only with costs and benefits that can be measured in dollars and cents. But that is not true. Much economic analysis involves cases like our elective course example. where it costs no extra tuition to take one elective course—that is. there is no direct monetary cost. Nonetheless. the elective you choose has an opportunity cost— the other desirable elective course that you must forgo because your limited time permits taking only one. More specifically, the opportunity cost of a choice is what you forgo by not choosing your next best alternative. You might think that opportunity cost is an add-on—that is. something additional to the monetary cost of an item. Suppose that an elective class costs additional tuition of $750: now there is a monetary cost to taking History of Jazz. [5 the oppor- tunity cost of taking that course something separate from that monetary cost? Well, consider two cases. First. suppose that taking Beginning Tennis also costs $750. In this case, you would have to spend that $750 no matter which class you take. So what you give up to take the History of Jazz class is still the Beginning Tennis class. period—you would have to spend that $750 either way. But suppose there isn't any fee for the tennis class. In that case, what you give up to take the jazz class is the enjoyment from the tennis class plus the enjoyment that you could have gained from spending the $750 on other things. Either way. the real cost of taking your preferred class is what you must give up to get it. As you expand the set of decisions that underlie each choice—whether to take an elective or not. whether to finish this term or not. whether to drop out or not— you'll realize that all costs are ultimately opportunity costs. Sometimes the money you have to pay for something is a good indication of its opportunity cost. But many times it is not. One very important example of how poor- ly monetary cost can indicate opportunity cost is the cost of attending college. Tuition The real cost of an item is its onion-nine cool: what you must give up in order to get it. ...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern