Recap Problem of Scarcity

Example No. 1 Benefit (Salary) Cost (Transportation) Net Benefit Job A Lahore 15,0001,00014,000 Job B Gujranwala 20,0007,00013,000 Rational Choice  Job A is better

Example No. 2 Benefit (Salary) Cost (Noise) Net Benefit Job A Bank 15,0000 Job B Factory 16,0002,00014,000 Rational Choice  Job A is better Is it possible for a consumer to choose Job B and still be rational ?

Decision to buy the book * SU means Satisfaction Units Opportunity Cost of buying the book and not giving charity = 20 SU Which is the benefit derived from giving charity. CostBenefit Derived in SU* Book20010 Clothes2005 Charity20020

Decision to buy the book * SU means Satisfaction Units Opportunity Cost of buying the book = 8 SU CostBenefit Derived in SU* Book20010 Clothes2005 Charity2008

1.Benefit from continued use of the book 2.The best second hand price that he can fetch in the market 3.Benefit from the best use of the money received from selling the book 4.If 3 > 1 then the decision to sell the book is rational 1.Benefit from continued use of the book 2.The best second hand price that he can fetch in the market 3.Benefit from the best use of the money received from selling the book 4.If 3 > 1 then the decision to sell the book is rational Decision to sell the book

Total cost for 10 cars = Rs. 10 million Total revenue for 10 cars = Rs. 9.5 million Total cost for 10 cars = Rs. 10 million Total revenue for 10 cars = Rs. 9.5 million The concept of Opportunity Cost

Decision about the 11 th car It will cost Rs. 0.8 million (Marginal Cost) It will be sold for Rs million (Marginal Benefit) “Marginal” Benefit (0.95) > “Marginal” Cost (0.80) Rational choice is to produce the 11 th car therefore MB > MC Decision about the 11 th car It will cost Rs. 0.8 million (Marginal Cost) It will be sold for Rs million (Marginal Benefit) “Marginal” Benefit (0.95) > “Marginal” Cost (0.80) Rational choice is to produce the 11 th car therefore MB > MC

The total cost of production of 11 cars is 10.8 million 10.8 Million The total revenue from selling 11 cars is Million “Total” Cost > “Total” Profit The total cost of production of 11 cars is 10.8 million 10.8 Million The total revenue from selling 11 cars is Million “Total” Cost > “Total” Profit

Choice & Opportunity cost revisited Rice (Bags) Cotton (Bushels) Opportunity Cost of Additional Unit A010 B19 C27 D34 E

Graphical illustration (PPF) Rice (millions of bags) Cotton (millions of bales) U =Unattainable I = Inefficient E D C B A

Summing Up Dictatorship Command or planned Economic System Free Economic System Rational Decision Making Choice and Opportunity Costs