...Opportunity Cost Paper If you could understand and apply one key concept in economics that would most affect the decisions you make in both your personal and professional life, it would be opportunity cost. That is a bold statement; therefore, you must understand why and how this statement is true. First, you must understand a definition: opportunity cost is the value of a resource in its next best use. These thirteen words are so deceptively simple that to many these words defy understanding. It is helpful to begin with a universal illustration. The most valued resource to most people is time. It is finite for everyone, considering people have 24 hours a day in which they must allocate work, family, sleep, fun, and other non-fun, non-work activities. Unless you are quite adept at multitasking, once you have decided to do something you have inherently decided not to do something else that most likely could have had value to you. That is, many of our choices among activities are mutually exclusive. If you decide to go to a movie, for example, those 2 hours will not be spent working out at the gym. In addition to the cost of the movie, you will have foregone the benefits of 2 hours of exercise. The true cost of the movie then is not just the $6.50 for the price of a matinee movie ticket, but also the exercise at the gym. Although the value of the exercise may be more difficult to quantify than the price of the movie ticket, you must take it into consideration when you decide...
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...Opportunity Cost Name Course Subject Among the key concepts in economics and in the whole world is that resources are finite, and they are not freely available. This is the fact that forms the entire basis for economics because if the resources were freely available and infinite then there would be no need for commerce and money. The scarcity of resource means that using a resource to make something means a person cannot use the same material to make something else at the same time. For that, it means the opportunity to make another several good with the same material is lost and consequently the opportunity to produce is said to have an opportunity cost. In economic real terms, the value of goods opportunity cost is the worth of the best substitute to production, in other words the next best thing which could be produced with the available resources. Opportunity costs are not just a hypothetical consideration in finance; they also have factual practical influences on choices. For example, a director may decide to enroll to university for an MBA course to advance the career. The MBA may cost the director approximately £40,000 over the two and a half years of the course. Conversely, if the director remains in employment with a salary of £40,000 per annum, but was expecting a £6,000 remuneration increase in the subsequent year, the two and a half year course will have a cost of £40,000, but an opportunity cost in lost wages of £86,000. Thus, the over-all...
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...travelers make an effort to minimize their losses and maximize their benefits. It is also placed in a situation in which neither traveler gives any concerns about the other but still acknowledge one another. Therefore, the fundamental nature of the traveler’s dilemma is to reach an equilibrium in which each traveler is able to gain an equal amount of benefits and losses. 2 Describe the opportunity cost of the choices made by the traveler. An opportunity cost is the measure of a cost in a missed opportunity. In a variety of different dilemmas, there is generally an infinite amount of choices to be made. In the traveler’s dilemma, he or she has the opportunity of submitting a certain amount in order to maximize their gains and minimize their losses. By only speaking in terms of opportunity costs in a traveler’s dilemma, it is very difficult to accurately determine the rational choices a traveler may decide on. He or she will only decide on the opportunities that will maximize their benefits and minimize their losses. Therefore, by following these rules, the benefits and losses of an opportunity will change, thus the Nash equilibrium will as well. 3 Frost entitled his poem “The Road Not Taken.” Why isn’t it entitled “The Road I Took”? Although there are multiple references in the poem that come from a first-person perspective, Robert Frost still entitled his poem “The Road Not Taken” rather than “The Road I Took”. I believe that Frost is describing the overall experience...
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...Introduction Opportunity cost refers to what you have to give up to buy what you want in terms of other goods or services. When economists use the word "cost," we usually mean opportunity cost. The word "cost" is commonly used in daily speech or in the news. For example, "cost" may refer to many possible ways of evaluating the costs of buying something or using a service. Friends or newscasters often say "It cost me $150 to buy the iPhone I wanted." Definitions and Basics Opportunity Cost, from the Concise Encyclopedia of Economics When economists refer to the "opportunity cost" of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book.... Getting the Most Out of Life: The Concept of Opportunity Cost, by Russ Roberts on Econlib To get the most out of life, to think like an economist, you have to be know what you're giving up in order to get something else.... Sometimes people are very happy holding on to the naive view that something is free. We like the idea of a bargain. We don't want to hear about the hidden or non-obvious costs. Thinking about...
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...tractor-trailer rig. Recently, Burton was boasting to some fellow truckers that his revenues were typically $25,000 per month, while his operating costs (fuel, maintenance, and depreciation) amounted to only $18,000 per month. Tractor-trailer rigs identical to Burton’s rig rent for $15,000 per month. If Burton was driving trucks for one of the competing trucking firms, he would earn $5,000 per month. Burton is proud of the fact that he is generating a net cash flow of $7,000 ($25,000 - $18,000) per month, since he would be earning only $5,000 per month if he were working for a trucking firm. • Compute both Burton Cummings’s explicit costs per month and his implicit costs per month. Mr. Cumming’s explicit cost are $18,000 (the cost of fuel, maintenance and, depreciation) Mr. Cumming’s implicit costs are $20,000 (the cost rental income @$15,000 and revenue earned@ ($25,000). • Compute the opportunity cost of the resources used by Burton Cummings each month. Mr. Cummings’s net opportunity cost is: ($13,000). • What advice would you give Burton Cummings? Explain your advice in terms of opportunity costs. It costs Mr. Burton more money to use his personal truck that to rent a truck. I would suggest the Mr. Burton rent a rig instead of driving his own truck. He could earn more money by renting. He has opportunity to increase his earning by renting his own truck and working for the competing...
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...produce 100 per month—or it could produce any combination of bicycles and bowling balls lying on a straight line between these two extremes. Respond to the following questions (you may want to construct a graph in order to help with your answers – you are not required to present a graph): a) What it is the opportunity cost of producing an additional bowling ball measured in terms of forgone bicycles in western Leisureland? b) What is the opportunity cost of producing an additional bowling ball measured in terms of forgone bicycles in eastern Leisureland? c) Explain the difference in opportunity cost between western and eastern Leisureland. Which region has a comparative advantage in producing bowling balls? Bicycles? d) Suppose it is determined that 400 bicycles must be produced. How many bowling balls can be produced? e) Where will these goods be produced? In Western Leisure Land 1 extra bowling ball comes with an opportunity cost of a quarter bicycle. In Eastern Leisure Land 1 extra bowling ball comes with an opportunity cost of 4 bicycles. Western Leisure Land has the advantage in producing bowling balls because it only costs them a quarter of a bicycle. Were as Eastern Leisure Land looses that ability to make 4...
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...can actually be producted to fulfill these wants. He or she has to choice betweent the family care and work. He or she may give up one of them. So the opportunity cost is the cost of any activity measured in terms of the best alternative forgone. He or she has to make the rational decision(choices that involve weighing up the benefit of any activity against its opportunity cost, ) it’s depend on the marginal cost has smaller than the marginal benefits. Marginal cost is the additional cost of doing a little bit more (or 1 unit more if a unit can be measured) of an activity. The marginal benefits is the additional benefits of doing a little bit more (or 1 unit more if a unit can be measured) of an activity. Assume that the second parent would be parenting children, looking after senior family members doing house hold activities like cleaning, cooking, washing, shoping etc. if the second parent takeing up a full time job ,he or she may give up the family care and go to work. So the opportunity cost is giving up parenting children, take care senior family menbers, if the second parent is getting a wage of $ 600 per week the chances of the opportunity cost rising is vey like to be higher than the wages to paid other person who has found to look after the family. So at this assumption, the maginal benefits is more than the marginal cost. The second parent has to get the...
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...Case 1.2 Opportunity cost and productivity in agriculture Summary This case study shows how the concept of opportunity cost can be applied to calculate a measure of the value of economic activity that incorporates resource costs due to environmental damage from the activity. Suggested answers 1 What is a society’s benefit from higher productivity? Productivity equals the ratio of value of output from a production activity to the value of resources used in doing that activity. Hence it is a measure of the amount of benefit that society obtains from the resources used in doing an activity. Because resources are scarce, productivity, the benefit that society obtains from applying its resources, matters. Society will be best off when it gets the greatest amount of benefit possible from any resources that it uses; in other words, by maximising productivity. Of course, as this case study shows, it is important to measure productivity properly (for example, including all resources that are used in doing an activity). 2 Can you think of other examples of activities that cause environmental damage where the value of that damage would need to be incorporated into the value of inputs used in production in order to construct a ‘true’ measure of the productivity of that activity? There are many possible examples. Where mining activity causes damage to the natural environment that reduces subsequent revenue from tourism or requires expenditure of resources to ‘clean-up’...
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...Choices QUESTIONS 1. What is an opportunity cost? How does the idea relate to the definition of economics? Which of the following decisions would entail the greater opportunity cost: Allocating a square block in the heart of New York City for a surface parking lot or allocating a square block at the edge of a typical suburb for such a lot? Explain. LO1 Answer: An opportunity cost is what was sacrificed to do or acquire something else. The condition of scarcity creates opportunity cost. If there was no scarcity, there would be no need to sacrifice one thing to acquire another. The opportunity cost would be much higher in New York City as the alternative uses for that square block are much more valuable than for a typical suburban city block. 2. Cite three examples of recent decisions that you made in which you, at least implicitly, weighed marginal cost and marginal benefit. LO1 Answer: Student answers will vary, but may include the decision to come to class, to skip breakfast to get a few extra minutes of sleep, to attend college, or to make a purchase. Marginal benefits of attending class may include the acquisition of knowledge, participation in discussion, and better preparation for an upcoming examination. Marginal costs may include lost opportunities for sleep, meals, or studying for other classes. In evaluating the discussion of marginal benefits and marginal costs, be careful to watch for sunk costs offered as a rationale for marginal...
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...page. Opportunity Cost Introduction In this paper you are going to have a list of questions referring to opportunity cost, absolute advantage, and comparative advantage. This is based on Michelle being able to grow 200 pounds of potatoes or raise 50 chickens if she uses all her resources for each. James is able to grow 80 pounds of potatoes or 40 chickens if he uses all his resources for each. What is Michelle’s opportunity cost of producing potatoes? The opportunity cost of producing potatoes for Michelle is not having the opportunity to raise chickens. She has the ability to grow 200 pounds of potatoes but might face a consequence of losing some, if not all, potatoes if there is a drought or if her land is not fertile enough to grow potatoes. In this instance, she might have lost some if not all her potatoes and never had the opportunity to raise chickens because she put all her resources into producing potatoes. What is Michelle’s opportunity cost of producing chickens? The opportunity cost of raising chickens for Michelle is not having the opportunity to produce potatoes. Based on her resources, she has the opportunity to raise 50 chickens but might face a consequence of the chickens developing a disease and either not living or not being able to produce edible meat from the chickens. In this case she might lose all her chickens to disease and never had the opportunity to produce potatoes because she put all her...
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...Opportunity cost is the monetary value of any activity measured in terms of the value of the next best alternative forgone (that is not preferred). In other language, it is the ritual killing of the second-best choice available to somebody, or group, which has picked among several mutually exclusive choices or capital budgeting decisions. Small Examples: In a restaurant situation, the opportunity cost of eating steak could be trying the salmon. The opportunity cost of ordering both meals could be twofold: the extra $20 to buy the second meal, and reputation with peers, as the diner may be thought of as greedy or extravagant for ordering two meals. A family might decide to use a short period of vacation time to visit Disneyland rather than doing household improvement work. The opportunity cost of having happier children could...
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...Opportunity cost, from an economics perspective, is the value of the alternative that must always be sacrificed to obtain a good or service. All sane people have unlimited wants which they try to satisfy with the limited resources of the world. Limited resources lead to scarcity, which then lead people to weigh their alternatives and make choices. In the end, no matter which choice they make, it will always leave behind a cost, an opportunity cost. Basically, with the resource of time, humans engage in activities, but for those activities chosen there is a cost, or a trade-off of having possibly invested that time in some other activity. Say for example you choose to spend one hour studying for a test instead of exercising; you gave up one hour of working out but gained one hour of study or vise versa. For resources used to produce capital or consumer goods there exists also trade-offs of having possibly used those resources for one or multiple other uses. As you can imagine there exists a pattern when dealing with opportunity cost. The law of increasing relative cost states that: as an economy or society focuses on producing more of one good, the opportunity cost of making supplementary units of that good typically increase as well. For example, I have two distinct video games; one has five levels and the other one has a maximum score of 300 points. If I play the first one for five hours and don’t play the second video game I will reach level five in the first one and obviously...
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... Weighing Opportunity Costs In our first week of Microeconomics we are looking closely at a specific scenario. We will use what we read and what we learned the first week, about the basics of Microeconomics. We will look closely at opportunity costs and at comparative advantages. The scenario this week is as follows. Two people, Michelle and James live alone in an isolated region. They each have the same resources available and they grow potatoes and raise chickens. If Michelle decides to use all her resources growing potatoes, she can grow about 200 pounds a year. If she devotes all her resources to raising chickens, she can raise 50 a year. If James devotes all his resources to growing potatoes, he can grow 80 pounds a year. If he devotes all his resources to raising chickens, he can raise 40 a year. Now we will answer a few specific questions about the scenario. What is Michelle’s opportunity of producing potatoes? The opportunity cost of producing potatoes, if all resources are used, is not raising any chickens. If Michelle used all resources to grow the potatoes, no resources would be left to raise chickens. What is Michelle’s opportunity cost of raising chickens? If Michelle decides to use all resources to raise chickens, her opportunity cost would be growing potatoes. If she uses all resources to raise chickens, nothing would be left over to grow potatoes. What is James’ opportunity cost of producing potatoes? His opportunity cost of producing potatoes...
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...Unit 1 Individual Project Opportunity Cost and Trade Advantages Heather L. Sellers AIU Online, Microeconomics ECON220-1401A-04 Abstract The unit 1 individual project has requested that specific questions in relation to Comparative Advantage, Absolute Advantage, Opportunity Cost and Trade be completed. This paper will show the formulas to determine the information for who has absolute advantage, who has comparative advantage and what the opportunity cost is for each trade option. This paper will also discuss the trade advantages of the individuals and the possibility of specialization involved in the requested details for each of the equations. Keywords: Comparative Advantage, Absolute Advantage, Opportunity Cost, Trade, Specialization Unit 1 Individual Project Opportunity Cost and Trade Advantages Michelle has enough resources to produce 200 pounds of potatoes or to produce fifty chickens. James has enough resources to produce eighty pounds of potatoes or forty chickens. The following sections will utilize this information to produce equations that identify the best use of the resources both James and Michelle have, as well as to identify trade options and benefits. To determine opportunity cost for Michelle and James the following equations were necessary. Michelle, Potatoes: 50 (Chickens)/200 (Potatoes) = ¼ (Opportunity cost for potatoes is that one fourth of the resources required to produce a chicken would be required to produce a pound of potatoes.) Michelle...
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...Introduction to Microeconomics and Opportunity Cost 1. What is the difference between microeconomics and macroeconomics? The key difference between micro-economics and macro-economics is that micro-economics is concerned with the individual, group or company level; whereas macro-economics is concerned with the study of economics on a national as well as holistic scale. Therefore micro-economics specifically focusses on issues that affect individuals and associated company/enterprise 2. What is the ceteris paribus assumption? Why is it used in economics? Ceteris paribus is It is often safe to assume that “Ceteris Paribus” concerns itself with the notion that all other variables, except those under immediate consideration are ‘held at a constant’ A Latin phrase meaning “all other things remaining constant” In economics, this phrase is used and referred because in the real world – it is difficult to isolate all the different variables that may influence or change the outcome of what one is researching and how an individual makes a decision as a result. In economics, this phrase is used to rule out the possibility of other factors changing, which may as a result have impact on the overall outcome of individuals 3. What is the difference between positive and normative statements in economics? Provide an example of each Positive Economics is based on “objectives” and “facts” whereas Normative Economics is “subjective” and “value” based. It is considered that Positive...
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