See exhibit 1 1 for more examples economists often

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Unformatted text preview: nity cost of your choosing to buy a sweater is two compact discs. (See Exhibit 1-1 for more examples.) Economists often say that life is full of trade-offs. What do they mean by this statement? The nature of a trade-off is that you can get more of one good, but only by getting less of another good. Speaking about trade-offs is just another way of speaking about opportunity cost. In other words, saying that “life is full of trade-offs” is really no different from saying that “every time we choose one thing over another, we incur an opportunity cost.” (You will read more about trade-offs in the next section.) opportunity cost The most highly valued opportunity or alternative forfeited when a choice is made. trade-off A situation in which more of one thing necessarily means less of something else. 8 QUESTION: Suppose I decide to spend $50 to buy some used car stereo speakers from a friend. If I hadn’t spent the money on the speakers, I could have purchased $50 worth of new clothes, or spent $50 on a present for my girlfriend, or given $50 to my mom’s favorite charity. Because I could have done any of these Chapter 1 What Is Economics? ANSWER: No. It is necessary to differentiate between what you could have done and what you would have done. Opportunity cost refers to what you would have done if you had not bought the speakers. It’s your next best choice, and only that choice. If you would have spent the $50 on your girlfriend’s present, then the present—and only the present— is what you actually gave up to buy the speakers. Your opportunity cost in this case can only be $50 worth of opportunity, not $100, $150, or $200 worth. Opportunity costs affect people’s decisions every day. In fact, a change in opportunity cost can, and often does, change a person’s behavior. Suppose Sunil has a parttime job at a local grocery store. Each day he goes to work at 2 p.m. and leaves at 6 p.m. Does he incur any opportunity costs when he chooses to work each day between 2 and 6 p.m.? He certainly does; whatever he would be doing if he weren’t working is the opportunity cost of his working. Now let’s increase the opportunity cost of Sunil’s going to work. Suppose one day Sunil is on his way to work when someone stops him and offers to pay him $300 for doing an easy task, but doing the task means that Sunil will not be able to go to work that day. What will Sunil do? Will he continue on his way to work or take the $300 and not go to work? An economist would predict that as the opportunity cost of working at his parttime job increases, compared to the benefits of working, Sunil is less likely to go to work. According to how economists think about behavior, whether it is Sunil’s or your own behavior, the higher the cost of doing something, the less likely it will be done. E X A M P L E : An economics professor at a California college noticed that more students are absent from class when the surf is good than when it isn’t. What might explain these absences? Well, it turned out that quite a few of the professor’s students were surfers. When the surf is not good, the 01 (002-029) EMC Chap 01 11/17/05 4:03 PM Page 9 Why Didn’t Chris Rock Go to College? ??? C hris Rock was born on February 7, 1966, in Andrews, South Carolina. Many of his early years were spent in the neighborhood of BedfordStuyvesant in Brooklyn, New York. He had two idols: one was boxer Sugar Ray Leonard and the other was comedian Eddie Murphy. Realizing that he wasn’t much of a boxer, Chris decided to become a comedian, like Murphy. One night, Eddie Murphy caught Chris Rock’s act at a club. He was so impressed with Rock that he cast him in his 1987 movie, Beverly Hills Cop 2. In the early 1990s, Rock became a regular on television’s Saturday Night Live. He went on to become one of America’s funniest comedians—doing movies, HBO specials, and more. Chris’s hard work and talent began paying off for him financially, with his earnings far exceeding that of the average 21-year-old. While Chris Rock was pursuing his comedy career, many people the same age were attending college. Why didn’t Rock go to college? He certainly could have afforded the tuition, and he would have been accepted had he applied. Could it be that the opportunity costs of attending college were just too high for Chris Rock? “We were so poor my daddy unplugged the clocks when we went to bed.” —Chris Rock To understand, think what it will cost you to attend college. Let’s say that room, board, tuition, books, fees, and living expenses add up to $20,000 a year. Multiplied by 4 years that comes to $80,000. Is $80,000 really the full cost of your attending college? What would you opportunity cost (for the surfer students) is low and they are more likely to come to class. After all, they’re not giving up any good waves. But when the surf is good, the opportunity cost for these students is high, and they are less likely to come to class. In other words, the more the students have to be doing if you didn’t go to college? Ch...
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This document was uploaded on 01/16/2014.

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