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09/29/09 1
EVERY CHOICE HAS A COST.
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Which are difficult economic decisions?
Preserve the desert tortoise or preserve the profits of a “greedy monopolistic land grabbing developer?”
Preserve the desert tortoise or the stock earnings of retired Mrs. McGillicudy who owns stock in the “greedy monopolistic land grabbing developer’s” company?
Preserve the desert tortoise or the Raven
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Difficult Decisions
Allocate Santa Catalina to Buffalo or native plants
Allocate San Clemente to the endangered Plover (bird) or land owners
Allocate Mojave to environmentalists or motorbikes
Northern forests to Spotted Owl or lumber and resulting jobs
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Easy or difficult
Easy decisions are between goods and
bads.
Most decisions are between two goods.
In the political arena, the decision is often
painted as good or bad, but that is not
usually the case.
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OPPORTUNITY COST The Cost of a Choice
What will you (did you) give up?Perhaps the most important concept
in economics. Things don’t have costs, choices do.
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The “free” tickets
Alternative 1Use the tickets yourself
Alternative 2Give the tickets to friends
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The “free” tickets
Alternative 1Use the tickets yourself
Alternative 2Give the tickets to friends
CHOICE OPPORTUNITY COST
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The results of the decision
Choice: The subjective evaluation of the selected alternative
Opportunity cost: the subjective evaluation of the best alternative NOT selected not what COULD have been done but what
WOULD have been done
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Some alternatives
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Narrow the alternatives to two
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Identify the choice and the opportunity cost
CHOICE
OPPORTUNITY COST
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How to best use their human capital on their 3 month anniversary?
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Some Alternatives
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Narrow it down to two
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Identify the Choice and the Opportunity Cost
CHOICE
OPPORTUNITY
COST
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A “free” hike in the woods
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Other examples
Typing a term paper“Free parking”Resources for “free” early childhood
educationResources for national defenseReduced class sizeWildlife habitats
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Preserving the environment is costly.
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Economic Decisions are made with incomplete information
Expectations can be erroneous
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Money
A way of exchanging personal resources for goods and services You work at California Pizza You earn money You use money to buy goods and services You exchanged your human capital for
goods and services that you desired
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Money is a tool for transferring resources and goods and services
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Money is a tool for transferring resources and goods and services
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Money is a tool for transferring resources and goods and services
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The Curse of the Crawling Camel
It is a mirageThere is no such
thing as a free lunch!There is really no
such choice as a free choice!
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Stating that economic choices have an opportunity cost is the
same thing as stating that scarce resources have
alternative uses.
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Opportunity cost is the value of the best foregone alternative
at the time that you make the decision.
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What does it cost you?You have a
scholarship for full tuition and all books.
There are no money costs to you.
Some say your education is free.
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If you can’t do it, it’s not opportunity cost!
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Opportunity cost is:
subjective
determined only by the decision-maker Why are you watching television, you could be
outside on such a beautiful day?• TV• Video games• Talking to your girl/boy friend
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natural resourceshuman capitalphysical capitalentrepreneurship
OR
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ECONOMICS
The study of individual choices concerning the use of limited resources among competing wants
Wants, resources, choices
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ECONOMICS
Economics can’t distinguish needs from wants – needs have no alternatives, therefore no choice, therefore no economics
In economics, people rank their wants according to their priorities.
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Why would an economist never say, “The best things in life are free?”
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Why would an economist never say, “We should preserve old growth forests at all costs?”
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An economist would never say, “If it saves one life, it’s worth it,” because it ignores the concept of ……………………….”
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Main Points
People choose because resources are limited and insufficient to fulfill their wants; people can’t have everything they want.
It is easier to choose between goods and “bads” than good and goods.
An economic decision involves using resources, goods or services
Every economic decision involves a cost. There is no such choice as a free choice.
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Main Points
Opportunity cost is subjective and can only be identified by the decision maker.
When people make a decision, they narrow the alternatives to two, select one (the choice) and give one up (the opportunity cost).
Economics is the study of individual choices concerning the use of limited resources among competing wants.
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Main Points
Money is a tool for transferring resources into goods and services or exchanging one good or service for another
Economics and finance are different. Economics is about resources; economic reasoning can be applied to finance.
In a study of economics, needs and wants can’t be distinguished. Economic reasoning ranks wants according to priorities.
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