9?10?08 ?Cost as Opportunity Cost $ is absolute Opportunity cost is relative -opportunity cost is the value in terms of your objectives of the next best alternative (B) -do A if the value of A > the value of B -do A if A is profitable/beneficial- value A > cost A -the cost of A should = the value of B Ex) Tax Accounting -revenues: $400,000 OR sell land for $10,000,000 -expenses (costs): $50,000 at 5%, $500,000/yr __________________ -accounting profit: $350,000 Economics Accounting: -revenues: $400,000 -expenses: $50,000 -opportunity cost: $500,000 ___________________________ -economic profit: -$150,000 (loss) ?Chapter 2? ?Criteria: -efficiency- always applies -equity (fairness) ?efficiency -objective: 1 dimension Ex) history test: obj: 100% Alt: how to study/study strategies (book, notes, group) Con: time, limited knowledge -if you get the highest score you possibly could have (not equal to 100), you were Efficient -objective: 2+ dimensions Ex) history and calculus test: obj: 100 history, 100 calculus Alt: same Con: same + limited time (how much to study for each?) ?strategy 1: focus on history, not calc Outcome: 100 history, 70 calc ?strategy 2: balance both subjects easily Outcome: 85 history, 80 calc ?strategy 3: focus on calc, not history Outcome: 75 history, 100 calc -which was best in terms of meeting your objectives? Not clear what the answer is- need a different definition of efficiency (see below) ?Law of Substitution: to move closer to one objective implies you must move farther from at least one other objective -in effect, the Law of Substitution is the absence of slack -efficiency is a weak criteria (doesn?t finalize any decisions, like equality) -you have to weight your choices- changes from a multiple dimension problem to a single dimension problem ?equity: -wealthy landowners 0.1% of population -poor farmers 99.9% of population ?people care more about equity than they do efficiency -you can give a solid definition of what is efficient but not of what is fair -2 types of equity -end results equity: are the outcomes fair? -process equity: are the rules of the economic game fair?
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