Opportunity Cost and SupplyOpportunity Cost and Supply

Presentation copyright © 1999 by Barry Brownstein

Opportunity CostOpportunity Cost Just like demand, supply and costs are also based

on valuations The cost of any action is the value of the

alternative opportunity that must be sacrificed in order to take the action.

Similarly manufactures must pay a resource a price that matches their best opportunity

There are no objective costs-cost is associated with action and choice

ExamplesExamples Why is it getting harder to find a teenage babysitter? What is the cost of an volunteer army?

– why does it transfer but not cut costs? What is the cost of a college education?

– Why is it different to different people? Is cutting grass in India with kitchen blades a high

or low cost method?– In the United States?

More ExamplesMore Examples

What is the cost per ticket to a baseball team that offers fifty free tickets?

– Does it depend upon the game?

– Does it depend on who it is offered too? A relative bought their house 50 years ago for

$20,000. It is now paid for and worth $250,000. They say” I’m glad a bought the house then because I can never afford it now.”- Critique their reasoning

Non-Market SystemsNon-Market Systems

Any system to be efficient has to consider the alternatives for the resources being used

Without a market it is difficult to get that information and to use it correctly

Thus non-market systems frequently allocate resources incorrectly through central decision making

SupplySupply

Supply is a schedule- a series of prices and series of quantities that people and firms would want to supply at each of those prices, every thing else held constant

Quantity supplied is the amount supplied at a given price

Graphing SupplyGraphing SupplyPrice

Quantity

Cost and PriceCost and Price

Costs are determined by prices Why do baseball tickets costs so much? Why does farmland near a city cost so

much? Encyclopedia Britannica