Some Tools of The Economist Wednesday May 13 2015 12 43 PM I Opportunity Costs a OPPORTUNITY COSTS the highest valued alternative sacrificed in order to choose an option Different for each person Subjective Your opportunity cost is only known by you i ii i A teacher does not know what a student choose to do instead of coming to class Difficult impossible for others to make decisions for you The government Your friends Parents i ii iii Money does NOT represent the total opportunity cost of an action i ii There are also intangible assets that are factored into opportunity costs I E Giving up sleep to come to class II Opportunity Costs Impact Decisions b c d a Billy just got accepted to college If he attends his tuition and books will total 10 000 per year If he does not attend he will clean rooms at the Madison chain of hotels and earn 15 000 per year Let s find the opportunity cost of Billy attending four years of college What is given up 10 000 4 40 000 00 Direct cost Tuition HAVE TO PAY Foregone Wages 15 000 4 60 000 00 Indirect costs GIVE UP THIS TOTAL LOSS 100 000 a It takes one hour to travel from New York City to Washington D C by plane but it takes four hours to drive The airfare is 200 and the gas and vehicle wear and tear is 80 Other things constant an individual would gain by choosing air travel if and only if his time were valued at more than how many dollars per hour Difference in 200 80 120 Difference in Hours 4 1 hr 3 hr 120 3hr 40 00 Professors are more likely to fly time is more valuable than money Students are more likely to drive more is more valuable than time III Failure to consider opportunity cost OPPORTUNITY COSTS the highest valued alternative sacrificed in order to choose an option A teacher does not know what a student choose to do instead of coming to class Billy just got accepted to college If he attends his tuition and books will total 10 000 per year If he does not attend he will clean rooms at the Madison chain of hotels and earn 15 000 per year HAVE TO PAY Foregone Wages 15 000 4 60 000 00 Indirect costs GIVE UP THIS It takes one hour to travel from New York City to Washington D C by plane but it takes four hours to drive The airfare is 200 and the gas and vehicle wear and tear is 80 Other things constant an individual would gain by choosing air travel if and only if his time were valued at more than Professors are more likely to fly time is more valuable than money Students are more likely to drive more is more valuable than time Difference in Hours 4 1 hr 3 hr 120 3hr 40 00 Professors are more likely to fly time is more valuable than money Students are more likely to drive more is more valuable than time III Failure to consider opportunity cost a b Leads to false conclusions and poor decision making This stadium improved the quality of life in Dallas and created jobs i ii iii iv v Ignored cost to build stadium Stadium built by government Government paid by tax payers Tax payers can t pay for daily needs i e milk at Walmart No one is buying Walmart s inventory due to high taxes Walmart employee losses job c Only true from stadium greater than benefit from other uses IV Trade makes both better off Trade is voluntary We only engage in mutually beneficial trades Increases the total wealth in an economy Moves goods to people who value them most V Transaction Costs i Selling text books one student gets money and the other student gets a cheap book TRANSACTION COSTS the time effort and other resources needed to search out negotiate and complex an exchange Transaction costs are a barrier to trade i Can either buy a banana for 0 69 or grow the bananas in your backyard and loose out on time money effort VI Middlemen reduce transaction costs a b MIDDLEMAN a person who buys and sells goods or services or arranges trades Middlemen make trades more efficient and lower their overall costs VII Property Rights a b c d a b a PRIVATE PROPERTY RIGHTS involved three things i ii iii Right to exclusive use Legal protection against invasion Right to transfer sell exchange or mortgage 1 I E Your car you can use your car whenever you can allow other people to use your car but they need consent to use your car you can give some one your car sell your car exchange your car mortgage your car Professors are more likely to fly time is more valuable than money Students are more likely to drive more is more valuable than time No one is buying Walmart s inventory due to high taxes Walmart employee losses job Selling text books one student gets money and the other student gets a cheap book TRANSACTION COSTS the time effort and other resources needed to search out negotiate and Can either buy a banana for 0 69 or grow the bananas in your backyard and loose out on I E Your car you can use your car whenever you can allow other people to use your car but they need consent to use your car you can give some one your car sell your i ii iii Right to exclusive use Legal protection against invasion Right to transfer sell exchange or mortgage 1 I E Your car you can use your car whenever you can allow other people to use your car but they need consent to use your car you can give some one your car sell your car exchange your car mortgage your car b Cannot infringe upon property rights of others i Cannot just drive into someone s car because they took your parking spot Owners benefit from using property in ways that others appreciate Owners have an incentive to care for their property Property rights create an incentive to conserve for the future VIII Private Property IX Common Property a b c a b Multiple people simultaneously claim a good or resource When everybody owns something nobody owns it Milton Friedman i The SGA officers and other students have seen many people riding the bikes at absurd speeds doing tricks and just abusing the bicycles in general X Lack of Property Rights a Tendency to over use i ii iii Public Parks Public lakes Oceans 1 Your apartment s kitchen Over fishing no one owns the fish so every one catches all the fish iv Without property rights economic growth is hindered b XI Production Possibilities Curve a PPC outlines all possible combinations of output that could be produced holding fixed Resources physical human natural Technology Simplify only two goods are produced i ii iii Slope of PPC amount of one product that must be given up to obtain another Trade creates value and …
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