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2 Some Tools of Economic Analysis What is opportunity cost? What questions must every economy answer? What are the different economic systems that exist in the world?
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1 TWO roads diverged in a yellow wood, And sorry I could not travel both And be one traveler, long I stood And looked down one as far as I could To where it bent in the undergrowth; Then took the other, as just as fair, And having perhaps the better claim, Because it was grassy and wanted wear; Though as for that the passing there Had worn them really about the same, The Road Not Taken (Robert Frost)
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2 And both that morning equally lay In leaves no step had trodden black. Oh, I kept the first for another day! Yet knowing how way leads on to way, I doubted if I should ever come back. I shall be telling this with a sigh Somewhere ages and ages hence: Two roads diverged in a wood, and I— I took the one less traveled by, And that has made all the difference. The Road Not Taken (Robert Frost)
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3 Choice and Opportunity Cost Making decisions requires comparing the costs and benefits of alternative choices. The opportunity cost of any item is the value of the next best alternative that is given up. Opportunity cost is subjective. Opportunity cost may vary with circumstance.
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4 Choice and Opportunity Cost Examples: The opportunity cost of… …going to college for a year is not just the tuition, books, and fees, but also the foregone wages. …seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater.
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5 Choice and Opportunity Cost A sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are irrelevant for present and future economic decisions.
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6 A C T I V E L E A R N I N G 1 : Exercise You can either spend spring break working at home for $80 per day or go to Florida for the week. If you stay home, your expenses will total about $100. If you go to Florida, the airfare, hotel, food, and miscellaneous expenses will total about $700. What is your opportunity cost of going to Florida? 6
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7 What Three Questions Must Every Economic System Answer? What goods and services will be produced? How will goods and services be produced? For whom will goods and services be produced?
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8 Economic Systems The “rules of the game” determine how an economic system answers these three questions Types of economic systems include: pure capitalism pure command system mixed systems transitional systems economies based on custom or religion
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9 A C T I V E L E A R N I N G 2 : Discussion Questions The United States is best described as a mixed system. 1.What are some elements of command in the U.S. economy? 2.What are some elements of tradition in the U.S. economy? 9
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