Opportunity Costs Measurement Topic 1 2 Opportunity Cost

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Opportunity Costs Measurement Topic 1. 2

Opportunity Costs Measurement Topic 1. 2

Opportunity Cost • Because we cannot have everything we want, we must make choices

Opportunity Cost • Because we cannot have everything we want, we must make choices • The thing we give up (our second-best choice) is called the opportunity cost of our choice ▫ This is the foregone value of the next best alternative • In the economic world, “both” is not an admissible answer to a choice of “which one” Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights 2 -11

Highest Valued Alternative • Options ▫ Watch TV Choice made ▫ Talk on the

Highest Valued Alternative • Options ▫ Watch TV Choice made ▫ Talk on the telephone ▫ Go on a date Highest valued ▫ Study economics alternative �The opportunity cost here is the highest valued alternative that could have been chosen (i. e. , study economics) Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights 2 -12

Inherit $40, 000 Two choices – buy a car or go to college •

Inherit $40, 000 Two choices – buy a car or go to college • Bought the car • Can’t go to college ▫ (Paid $40, 000) College graduate (lifetime earnings) $1, 300, 000 High School graduate (lifetime earnings) Opportunity Cost Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights $ 800, 000 $ 500, 000 2 -13

California 1967 -1997 • Prisons ▫ Added 21 additional prisons • Colleges ▫ Added

California 1967 -1997 • Prisons ▫ Added 21 additional prisons • Colleges ▫ Added 1 additional college The Opportunity Cost of building more prisons is building fewer colleges Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights 2 -14

California 1990 - 1997 • Prison guards + 10, 000 • College employees -

California 1990 - 1997 • Prison guards + 10, 000 • College employees - 10, 000 Obviously, the opportunity cost of one additional prison is guard is one college employee Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights 2 -15

Full Employment 1 • A five percent unemployment rate 1 From 1971 – 1996

Full Employment 1 • A five percent unemployment rate 1 From 1971 – 1996 the unemployment rate was above 5%. In recent years, this has hovered above 4 %. If it stays this low, the next edition of the textbook may adjust this to 4 % Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights 2 -16

Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 2 -35

Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 2 -35

Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights 2 -36

Copyright 2002 by The Mc. Graw-Hill Companies, Inc. All rights 2 -36