econ lecture 2 - opp cost
Post on 20-Jan-2017
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T R A D E - O F F S A N D O P P O RT U N I T Y C O S T
L E C T U R E 2
W H AT I S O P P O R T U N I T Y C O S T ?
• In short, Opportunity Costs are the benefits you sacrifice when you make a choice.
• Sleep vs. Study - what is the cost of sleeping in later vs getting up to study?
F E L D M A N ’ S S E L F - S E R V I C E B A G E L B U S I N E S S
• Why did Feldman set up his business this way?
• What were the opportunity costs?
• What were his incentives?
F E L D M A N ’ S T R A D E - O F F
SELF-SERVICE • More time to do other things
• Implies trust in the customers
• Don’t have to pay or train employees
• Don’t have to worry about employee theft
• More locations and therefore more income
TRADITIONAL
• Get 100% of the revenue • Provide customer service • Workers perform essential functions • Can provide more goods and services and provide a deeper experience • Building customer relationships is easier
T R A D E - O F F A N A LY S I S• Economic models assume that
individuals are rational.
• People can rank their preferences from high to low, or best to worst
• People never purposely choose to make themselves worse off.
• If expected benefits are greater than expected costs for a given choice, it is in the agent’s best interest to make that choice.
T H E R E I S N O S U C H T H I N G A S A F R E E L U N C H
• There is always a cost associated with everything. Even if the lunch is “free” for you, someone paid a cost to grow the food and make the lunch for you.
• Because of this, we know nothing is truly free.
• Since nothing is free, we are forced to make choices about how we distribute and acquire resources.
Opportunity cost at the national levelNational economies must decide on a combination of goods and services to meet the demands of their citizens.
When an economy is operating at full capacity a production possibilities frontier or limit can be created. This curve is useful in demonstrating the concept of opportunity cost as it demonstrates that the only way to produce something new is to give up the production of another item.
The most popular example of this used is the model of guns vs. butter.
Guns vs. Butter(s)•The relationship between the allocation of national production of guns and butter are inversely connected. Assuming total production stays constant, as production of guns increases, production of butter decreases and vice versa.
If the maximum production capability of a national economy is increased, then the production possibilities frontier (curve) can be pushed outward allowing for more total production of goods. This can only occur when the factors of production (Land, Labor, Capital and Entrepreneurship) increases and/or improves.
T W O T H I N G S W E A L L M U S T D O
• In life, we must do two things:
• 1. Make Choices
• 2. Live with the consequences
S U M M A R Y
• Economics: Science of Choice and the alloca0on of scarce resources
• Scarcity: unlimited wants vs. limited supply
• Trade-‐off: best 2 choices
• Incen3ves: posi0ve benefits/reason for doing something
• Opportunity Cost: benefits sacrificed
• Nothing is free because everything has a cost
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