Chapter 2: Some Tools of the Economist ECO2023Opportunity Cost: Opportunity Cost- highest valued alternative sacrificed in order to choose an option. Opportunity cost can only be measured by the decision-maker. *It is hard for someone other than the decision-maker to make choices on that person’s behalf. *Preferences change with time and circumstances. Monetary costs reflect opportunities forgone. Monetary costs do not represent the total opportunity cost of an option. EX: Monetary cost of attending class : bus fare, parking, gasoline costs)Failure to consider opportunity cost often leads to unwise decision-making. Trade Creates Value: 1. When individuals engage in a voluntary exchange, both parties are made better off. - An exchange will not occur unless both parties agree to it and they will not do so unless the exchange makes them better off. - EX: Janet loves tomatoes but hates onions and Brad hates tomatoes but loves onions. They trade! 2. By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society’s resources. - Trade can create value by moving goods from those who value them less to those who value them more. - EX: If Janet and Brad had never met and were eating their salads alone they would not get as much enjoyment out of their salad andthe value would go down. - By channeling goods and resources toward those who value them most, trade creates wealth for both the trading partners and for the nation. Transaction Cost-A Barrier to Trade: Transaction Costs- the time, effort, and other resources needed to search out, negotiate, and complete an exchange. - EX: You are really hungry late at night and are wishing for a meal from your favorite fast food restaurant. You would gladly pay the $4 price for the value meal you have in mind, but you feel it is just not worth the time and effort to get dressed and make that drive. - High transaction costs can barrier a potentially productive exchange.- Reductions in transaction costs will increase the gains from trade. The Middleman As A Cost ReducerMiddlemen- people who buy or sell goods or services or arrange trades. A middleman reduces transaction costs. - Middlemen provide buyers and sellers information at a lower cost and arrange trades between them.- Car dealers and grocers are middlemen (see page 22-23)Importance of Property Rights: Property Rights- the right to use, control, and obtain the benefits from a good or resource .Private Property Rights- property rights that are exclusively held by an owner andprotected against invasion of others. Private property can be transferred, sold, or mortgaged at the owner’s discretion. - Private owners can do anything they want with their property as long as theydo not use it in a manner that invades or infringes on the rights of another. - Because an owner has the right to control the use of property, the owner alsomust accept responsibility for the outcomes of that control. - Common-property ownership occurs when multiple people simultaneously have or claim ownership rights to a good or resource. - If the resource is open to all, none of the common owners can prevent others from using or damaging the property.- Private ownership provides people with a stronger incentive to take care of things and develop resources in ways that are highly valued by others. 1. Private owners can gain by employing their resources in ways that are beneficialto others, and they bear the opportunity cost of ignoring the wishes of others. Private ownership gives people a strong incentive to use property in a way that will also fulfill the wishes of others.2. Private owners have a strong incentive to care for and properly manage what they own. EX: If you own a car you are more likely to take care of it. EX: Berry college purchased 20 bikes to be placed around campus for everyone’s use. Within 2 months they were in bad condition. 3. Private owners have an incentive to conserve for the future – particularly if property is expected to increase in value. People have a much stronger incentive to conserve privately owned property than they do commonly owned property. EX: (In class Hershey kiss activity) EX: Overfishing the sea because the sea is common property.4. Private owners have an incentive to lower the chance that their property will cause damage to the property of others. Private owners can be held accountable for damage done to others through the misuse of their property. EX: A chemical company has control over its products, but, exactly for the reason, it is legally liable for damages if it mishandles the chemicals. Because private property owners can be held responsible for the damages they cause, they have an incentive to use their property responsibly and take steps to reduce the likelihood of harm to others. Private Ownership and Markets Private ownership and competitive markets provide the foundation for cooperative behavior amongst individuals. When private property rights are protected or enforced, the permission of the owner must be sought before anyone else can use the property. If you want to use a good or resource, you must either buy or lease from the owner. Private ownership and markets can play an important role in environmental protection and natural resource conservation. Production Possibilities Curve-AKA PPF or PPFrontier PPC- shows the maximum amount of any two products that can be produced from a fixed set of resources, and the possible trade-offs in production between them. PPC’s are about trade-offs and making choices. Points on the PPC are efficient Points inside the curve are inefficient Points outside the curve are unattainable. The PPC can shift…- SHIFT IN-shrink, produce less. - SHIFT OUT- growth, produce more. The Production Possibilities Curve shows all of the maximum combinations of two goods that an economy will be able to produce: (1) Given a fixed quantity of resources(2) Holding the level of technology constant(3) Assuming all resources are used efficientlyShifting the Production Possibilities Curve Outward: 1. An increase in the economy’s resource base would expand our ability to producegoods and services. - If we have more or better resources, we could produce a greater amount of all goods. Investment- the purchase, construction, or development of resources, including physical assets, such as plants and machinery, and
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