Transcript Document

• Opportunity Cost
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Opportunity cost
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Thus, opportunity costs are not restricted
to monetary or financial costs: the Real
versus nominal value (economics)|real
cost of Production possibilities
frontier|output forgone, lost time, pleasure
or any other benefit that provides utility
(economics)|utility should also be
considered opportunity costs.
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Opportunity cost - Opportunity costs in production
Opportunity costs may be assessed in
the decision-making process of
production (economics)|production. If
the workers on a farm can produce either
one million pounds of wheat or two
million pounds of barley, then the
opportunity cost of producing one pound
of wheat is the two pounds of barley
forgone (assuming the production
possibilities frontier is linear). Firms
would make rational decisions by
weighing the sacrifices involved.
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Opportunity cost - Explicit costs
Explicit costs are opportunity costs that
involve direct monetary payment by
producers. The opportunity cost of the
factors of production not already owned by
a producer is the price that the producer
has to pay for them. For instance, a firm
spends $100 on electrical power
consumed, their opportunity cost is $100.
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Opportunity cost - Implicit costs
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Implicit costs are the opportunity costs in factors of
production that a producer already owns
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Opportunity cost - Evaluation
The opportunity cost of a city's
decision to build the hospital on its
vacant land is the loss of the land for a
sporting center, or the inability to use
the land for a parking lot, or the
money which could have been made
from selling the land
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Opportunity cost - Opportunity cost simplified
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Opportunity cost is what you have to forgo when you
choose to do A rather than B.
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Interest - Opportunity cost
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Opportunity cost encompasses any other
use to which the money could be put,
including lending to others, investing
elsewhere, holding cash (for safety, for
example), and simply spending the funds.
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Microeconomics - Opportunity cost
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Opportunity cost of an activity (or goods) is
equal to the best next alternative
uses/foregone.
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Microeconomics - Opportunity cost
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Although opportunity cost can be hard
to quantify, the effect of opportunity
cost is universal and very real on the
individual level. In fact, this principle
applies to all decisions, not just
economic ones.
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Microeconomics - Opportunity cost
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Similarly, the opportunity cost of attending
university is the lost wages a student could
have earned in the workforce, rather than
the cost of tuition, books, and other
requisite items (whose sum makes up the
total cost of attendance).
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Microeconomics - Opportunity cost
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The true opportunity cost would be the forgone
profit of the most lucrative of those listed.
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Microeconomics - Opportunity cost
One question that arises here is how to
determine a money value for each alternative
to facilitate comparison and assess
opportunity cost, which may be more or less
difficult depending on the things we are trying
to compare. For example, many decisions
involve environmental impacts whose
monetary value is difficult to assess because
of scientific uncertainty. Valuing a human life
or the economic impact of an Arctic oil spill
involves making subjective choices with
ethical implications.
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Microeconomics - Opportunity cost
Opportunity cost is vital in understanding
microeconomics and decisions that are made.
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Cost of conflict - Opportunity Cost
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According to the reports, countries in the
Middle East that are directly involved in or
affected by the Israeli-Palestinian conflict,
internal strife in Lebanon and the US
invasion of Iraq have lost a $12 trillion (in
2006 dollar value) in opportunity costs
from 1991 to 2010
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Production possibility frontier - Opportunity cost
Opportunity cost is measured in the
number of units of the second good
forgone for one or more units of the first
good.
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Production possibility frontier - Opportunity cost
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The ratio of opportunity costs is determined by the
marginal rate of transformation.
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Feminist economics - Criticisms of opportunity cost
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There is also the issue of whether any
enjoyment of the activity should be
deducted from the opportunity cost
estimate.
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Austrian School - Opportunity cost
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Opportunity cost is the cost of any activity
measured in terms of the value of the next
best alternative foregone (that is not
chosen)
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Parable of the broken window - The opportunity cost of war
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The economic stimulus to one nation's
defense industry|defense sector is
offset not only by immediate
opportunity costs, but also by the
costs of the damage and devastation of
war to the country it attacks
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Economic problem - Opportunity cost and Production Possibility Frontier or Production
Possibility Curve.
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For example, say that we have isolated
two goods, food and clothing, and we look
at what would happen if there was
increased production of food (there is an
opportunity cost of clothes so clothes
would go down as food goes up), this
varies according to what effects there are
including new technology and new
resources.
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Economy of Egypt - Opportunity cost of conflict
A
report[http://www.strategicforesight.com/pu
blication_pdf/39166Cost%20of%20Conflict%2
0in%20the%20Middle%20East.pdf], Strategic
Foresight Group report: Cost of Conflict in the
Middle East 2009 by Strategic Foresight
Group has calculated the opportunity cost of
conflict for Egypt since 1991 is almost $800
billion. In other words, had there been peace
since 1991, an average Egyptian citizen
would be earning over $3000 instead of $1700
he or she may earn next year.
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Opportunity cost of capital
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The 'opportunity cost of capital' is the
expected rate of return forgone by
bypassing of other potential investment
activities for a given capital
(economics)|capital.
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Economy of Syria - Opportunity cost of conflict
A
report[http://www.strategicforesight.com/Cost
%20of%20Conflict%20-%206%20pager.pdf ]
by Strategic Foresight Group, a think tank in
Asia has calculated the opportunity cost of
conflict for the Middle East from 1991-2010 at
US$12 trillion (12,000,000,000,000). Syria's
share in this is over a $150 billion. The
government also spends almost 7% of its
GDP on the military, compared to 2% spent
on health care.
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Opportunity costs
1
Thus, opportunity costs are not restricted
to monetary or financial costs: the Real
versus nominal value (economics)|real
cost of Production possibilities
frontier|output forgone, lost time, pleasure
or any other benefit that provides utility
(economics)|utility should also be
considered opportunity costs.
https://store.theartofservice.com/the-opportunity-cost-toolkit.html
Opportunity costs - Explicit costs
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For instance, if a firm spends $100 on
electrical power consumed, its explicit
opportunity cost is
$100.[http://www.usna.edu/Users/econ/
pschmitt/FE210/review2.pdf Explicit vs
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Opportunity costs - Implicit costs
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The implicit part of the opportunity
cost of producing the widget is the
revenue lost by not selling the steel
and not renting out the machinery
instead of using them for production.
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Opportunity costs - Evaluation
The opportunity cost of a city's
decision to build the hospital on its
vacant land is the loss of the land for a
sporting center, or the inability to use
the land for a parking lot, or the
money which could have been made
from selling the land
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Opportunity costs - Evaluation
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'Q': Suppose you have a free ticket to a
concert by Band A. The ticket has no
resale value. On the night of the concert
your next-best alternative entertainment is
a performance by Band B for which the
tickets cost $40. You like Band B and
would usually be willing to pay $50 for a
ticket to see them. What is the opportunity
cost of using your free ticket and seeing
Band A?
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Opportunity costs - Evaluation
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'A': The benefit you forgo (that is, the value
to you) is the benefit of seeing Band B. As
well as the gross benefit of $50 for seeing
Band B, you also forgo the actual $40 of
cost, so the net benefit you forgo is $10.
So, the opportunity cost of seeing Band A
is $10.
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