1、Opportunity costsScarcitynEconomics is the study of how individuals and economies deal with the fundamental problem of scarcity.nAs a result of scarcity,individuals and societies must make choices among competing alternatives.Opportunity CostnThe opportunity cost of any alternative is defined as the
2、 cost of not selecting the next-best alternative.nExample:Suppose that you own a building that is worth$100,000 today and is expected to be worth$100,000 one year from today.If the interest rate is 10%,what is the opportunity cost of using this building for one year?Example IInThe opportunity cost o
3、f college attendance includes:n the cost of tuition,books,and supplies,nforegone income(this is usually the largest cost associated with college attendance),andnpsychic costs.nWhat about room and board?Example III:nOpportunity cost of attending a movie:nopportunity cost of ticketsnopportunity cost o
4、f timeMarginal analysisnMarginal benefit=additional benefit resulting from a one-unit increase in the level of an activitynMarginal cost=additional cost associated with one-unit increase in the level of an activityNet benefitnIndividuals are not expected to maximize benefit;nor are they expected to
5、minimize costs.nIndividuals are assumed to attempt to maximize the level of net benefit(total benefit minus total cost)from any activity in which they are engaged.Marginal analysisnMB MC expand the activitynMB MC contract the activitynoptimal level of activity:MB=MC (Net benefit is maximized at this
6、 point)Marginal benefitnMB generally declines as the level of an activity rises,ceteris paribus.nConsider the MB of time spent studying:Marginal costnFor most activities,marginal cost rises as the level of the activity increases.Optimal study timenThe optimal amount of study time occurs at the point
7、 at which MB=MCProduction possibilities curvenAssumptions:nA fixed quantity and quality of available resourcesnA fixed level of technologynEfficient production(i.e.,no unemployment and no underemployment)Example:study timen4 hours left to study for two exams:economics and calculusnOutput=grades on e
8、ach examnFixed resources?nFixed technology?nNo unemployed nor underemployed resources?Alternative uses of timeLaw of diminishing returnsnLaw of diminishing returns:output will ultimately increase by progressively smaller amounts when the use of a variable input increases while other inputs are held
9、constant.nDoes this apply in this example?What are the fixed inputs?Production possibilities curveMarginal opportunity costnMarginal opportunity cost=the amount of another good that must be given up to produce one more unit of a good.Calculating marginal opportunity costnIn the interval between poin
10、ts A and B,the marginal opportunity cost of 1 point on the economics exam is 1/3 of a point on the calculus exam.Marginal Opportunity Cost(continued)nIn the interval between points B and C,the marginal opportunity cost of one point on the economics exam equals 4/3 of a point on the calculus exam.Law
11、 of increasing costnLaw of increasing cost marginal opportunity cost rises as the level of an activity increasesReasons for law of increasing costnLaw of diminishing returnsnSpecialized resources(heterogeneous labor,land,capital,etc.)Specialized resources in farmingnSome land,labor,and capital is be
12、tter suited for wheat production and some is better suited for corn productionUnemployed or underemployed resourcesPoints outside of the PPCEconomic growthCommodity-specific technological changeSpecialization and tradenAdam Smith economic growth is caused by increased specialization and division of
13、labor.Gains from specialization and division of labornspecialization in areas that match the skills and talents of workersn“learning by doing”increase in productivity from task repetitionnless time lost while switching from task to taskSpecialization and tradenAs noted by Adam Smith,specialization a
14、nd trade are inextricably linked.nAdam Smith and David Ricardo used this argument to support free trade among nations.Absolute and comparative advantagenAbsolute advantage an individual(or country)is more productive than other individuals(or countries).nComparative advantage an individual(or country
15、)may produce a good at a lower opportunity cost than can other individuals(or countries).Example:U.S.and JapannSuppose the U.S.and Japan produce only two goods:CD players and wheat.Absolute advantage?nWho has an absolute advantage in producing each good?Comparative advantage?nWho has a comparative a
16、dvantage in producing each good?Gains from tradenOpportunity cost of CD player in U.S.=2 units of wheatnOpportunity cost of CD player in Japan=4/3 unit of wheatnIf Japan produces and trades each CD player to the U.S.for more than 4/3 of a unit of wheat but less than 2 units of wheat,both the U.S.and
17、 Japan gain from trade and can consume more goods than they could produce by themselves.Gains from trade(continued)nNote that the U.S.has a comparative advantage in producing wheat.nCountries always expand their consumption possibilities by engaging in trade(since they acquire goods at a lower opportunity cost than if they produced them themselves).Free trade?nIf each country specializes in the production of those goods in which it possesses a comparative advantage and trades with other countries,global output and consumption in increased.
