Economics and Opportunity Cost

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Four Useful Economic Concepts
Commerce 394: Government and Business Keith Head Sauder School of Business January 7, 2013

Lecture 2: Learning Objectives
After reading Brander Chapter 2 and attending this lecture, students should know how to Apply the 4 concepts, opportunity cost, marginalism, incentives, and efficiency to both daily life and government policy. Identify which concepts are relevant when reading articles in the news. use the marginalist diagrams predict and analyze incentive issues associated with government policies.

The case of Jericho Garrison
The 39 Canadian Brigade Group is headquartered at the Jericho Garrison on West 4th Avenue. The following is a real posting from forums.army.ca: As I was passing by there the other day with my buddy...we started talking about how the garrison is sitting on some pretty prime real estate. Its right in a very posh area of vancouver down there. My question is (and forgive me if it seems stupid) is why the heck doesn’t the CF, which owns this massive chunk of primo real estate in vancouver, sell the land, make a kiiling, build a new base on cheaper land further out of the city and maybe make a decent profit...I know it would take a while to do something like that, but if the CF is strapped for cash like they always say they are, then why not look at creative ways of making some cash...the land they occupy in Jericho is worth a fortune...

Jericho Garrison

i>Clicker Quiz: Jericho Garrison
Which economic concept is most relevant in the posting?

A B C D

Opportunity Cost Marginalism Incentives Efficiency

Opportunity Cost

Textbook Definition: the value of the best foregone alternative Another Definition: The opportunity cost of X is the amount of Y given up to get X, where Y is the best alternative to X.

i>Clicker Quiz: Opp. cost example
Example: Your rich aunt gives you $200 to spend in NYC. Broadway shows cost $98. Movies cost $14. What is the opportunity cost of the Broadway show?

A B C D E

Zero 14% of a movie. 14 movies. 7 movies. Insufficient information to answer.

i>Clicker Quiz: Opp. cost example
Suppose you spend $98 on a ticket. Upon arriving at the stadium, you realize you forgot the ticket at home. There is no time to get it. Someone offers to sell you a ticket for $126. Movies (at $14 each) are still your next best alternative.

What is the opportunity cost of the Canucks game?

A B C D

Zero 7 movies 9 movies 16 movies

Opportunity versus “accounting” costs

Units of measurement differ Opportunity costs EXCLUDE sunk costs. Canucks game example (previous iClicker question)

Opportunity costs INCLUDE costs for which there is no observed outlay. Parent lets university-student continue to live at home. Getting a (full-time) MBA. Jericho Garrison.

2013-01-06

Four Useful Economic Concepts

Opportunity versus “accounting” costs

Units of measurement differ Opportunity costs EXCLUDE sunk costs. Canucks game example (previous iClicker question)

Opportunity versus “accounting” costs

Opportunity costs INCLUDE costs for which there is no observed outlay. Parent lets university-student continue to live at home. Getting a (full-time) MBA. Jericho Garrison.

respectively the no-outlay costs are foregone rent to parents (or lower interest from downsizing to a house with one fewer bedroom), foregone salary, foregone rent/sales revenue. Another interesting example is the fallacy of assured supply. Suppose you are air carrier worried about price of oil so you buy an oil well and refinery to be sure you don’t have to pay high market cost of oil. but even so you’ll have the opportunity cost that you could sell that oil at a high price.

i>Clicker Quiz: Jericho Beach Park?
Should we follow the same logic as before and sell the park for real estate?

A B C D

Yes, the economic logic is overwhelming. Yes, and Stanley Park should be sold off as well. No, the Garrison land should be private residential, but the park...
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