Opportunity Cost

Opportunity Cost

There is no free lunch in life. Even the free slice of pizza offered by a company at a job fair, is NOT free. In exchange for the slice, you gave them your most precious resource....time!

Time that you could have spent walking to the library to pick up the book for the next test, 
or Time that you could have spent resolving a confusion with your friend, 
or some such.

As long as you understand that the cost of something is not just dollars one pays for it, but the inherent loss of an opportunity to do something else of value, then you can figure out what to do and how much.

Opportunity cost (OC) then is Opportunity Lost.

Should Roger Federer bake muffins for the next party in his house? In the one hour that he bakes, he could be instead playing tennis which in turn would fetch him millions of dollars.....so the opportunity cost of the muffins is not the cost in dollars of flour, sugar and butter, but the millions he misses due to missed tennis!

Clearly OC is not always in terms of dollars, it is in terms of what you missed.

If you know that with 2 hours in your hand you could either read 60 pages of a book, or watch 6 episodes of a show, then the 
OC of reading 1 page of a book is 6/60=1/10th of an episode
OC of a show is 60/6 = 10 pages of a book

What is the OC of your attending Macro class?  

MicroEconomics and MacroEconomics

MicroEconomics and MacroEconomics

So Micro is when you are zooming in, to reach that smallest entity in the economy and analysing it's behavior. Thus a consumer or a producer is a perfect entity whose typical behavior we study in micro economics.

Then Macro is zooming out to see an overall picture of the economy. Thus the health of the economy in terms of gross or total production, employment, money flow, income, all are studied in macro economics.

Milk prices going up....micro or macro?
Micro because milk is just one of millions of products sold in the economy, and so many people perhaps do not even buy milk at all! (think about the lactose intolerants and vegans!)

How about gas prices going up.....micro or macro?
Yes, most people own cars and need gas for the cars, but still...gas is just one of the many products.

Most prices going up? Micro or macro?
Hmmmm.....most prices going up, is economy wide phenomenon....it's inflation! So macro.

Scarcity, Choice and Economics

Economics is 

...not English Literature where you will read stories, novels and poems and be rewarded for fanciful imagination. 
...not Math where there is always one Right answer, all else being wrong.
...not Science whose rules are rigid and strong and the reactions therefore predictable, or explosive if unpredictable.

It is at best a condensation of aggregate human behavior with respect to decision making under constraints.

The constraints are tangible, and real, because resources (anything of value) is available in only limited supply. The scarcity necessitates choice-making, and Economics then is the effort to analyse the fundamentals of the process of making choices.