CostConsider the followingTwo types of CostHistorical CostHistorical costs do not explain behaviorWhat explains behavior?MisconceptionsExampleHow to add up costs?Example.A better exampleAnother example.Consider:What’s wrong with this conversation?More MisconceptionsBroken Window FallacySummaryCostSubstitution requires sacrifice – a cost.Consider the followingHave these people beaten the “system”?Two types of CostThis video helps us think about two different ideas of cost:(1) historical cost(2) opportunity costHistorical Cost“What you paid for something”• accounting cost• direct expenses or expendituresHistorical costs do not explain behaviorWhat explains behavior?PRINCIPLE #4. Opportunity Cost:“The value of one’s highest forsaken alternative”“What you gave up to get something”Misconceptions•cost depends on alternatives•alternatives require an action to be taken•keeping a gift can incur a costExampleSuppose instead of attending class you could have either:•Slept in ($25)•Played video games ($15)•Talked on the phone ($10)•Surfed the Internet ($5)What is the cost of attending class today?How to add up costs?Sometimes the highest forsaken alternative is a collection of smaller sacrificesExample.What is the cost of a hamburger if the price is $3.05 but you have to wait an hour in line?A better exampleUTA’s prices for parking are as follows:1 day $11 week $31 month $12.501 year $190Why would anyone – even full time faculty or students – by a year permit?Another example.TuitionTextbooksRental paymentsForegone wagesWhat is the cost of your education?Consider: 1. Suppose you live in L.A. and the Kings finally make it to the Stanley Cup finals. If people are willing to pay $1000 for a ticket with a face value of $100, and someone gives you a ticket, what does it cost you to attend the game? 2. What kind of army would be the most costly – an army made up of volunteers or one done via the draft?What’s wrong with this conversation? Person 1: “Boy, there’s never anyone in this club.”Person 2: “It doesn’t matter, the owners own the building and don’t have to pay any rent.”More Misconceptions•Cost is not a “bad”•Rising costs is sometimes goodBroken Window Fallacy•Government cannot “create” jobs•Disastrous and calamities cannot “create” economic activity•Wars cannot “create” employmentSummary•Cost is what you sacrifice•Cost is hard to measure – the difference between what is “seen” versus
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