GWARTNEY – STROUP – SOBEL – MACPHERSON

Some Tools of the Economist
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Chapter: 2

To Accompany: “Economics: Private and Public Choice, 15th ed.”
James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson
Slides authored and animated by: James Gwartney & Charles Skipton
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page

What Shall We Give Up?

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15
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page

Opportunity Cost

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15
edition
Gwartney-Stroup
Sobel-Macpherson

• Opportunity cost:
The highest valued activity sacrificed in making a choice.
• Opportunity costs are incurred when a choice is made.
• They are subjective and vary across persons.
• If an option becomes more costly, an individual will be less likely to choose it.

Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page

Opportunity Cost

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15
edition
Gwartney-Stroup
Sobel-Macpherson

• All choices involve costs.
• Consider the costs of going to college.
• The opportunity cost of going to college includes:
• Monetary cost: tuition, books.
• Non-monetary cost: forgone earnings.
• If the opportunity cost of college rises (e.g. tuition rises or you get a fantastic job offer) then one will be less likely to attend college.

Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page

Trade Creates Value

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15
edition
Gwartney-Stroup
Sobel-Macpherson
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page

Trade and Transactions Costs

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15
edition
Gwartney-Stroup
Sobel-Macpherson

• Mutual gain is the foundation of trade.
• Value can be created by exchanges that move goods to individuals who value them more.
• Transactions costs: the time, effort, and other resources needed to search out, negotiate, and consummate an exchange.
• Transactions costs reduce our ability to produce gains from potential trades.
• How does the Internet reduce transactions costs and thereby enhance trade?
• Examples: eBay, iTunes, Amazon.com.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page

Trade and the Middleman

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15
edition
Gwartney-Stroup
Sobel-Macpherson

• Middleman:
A person who buys and sells, or arranges trades.
• Middlemen reduce transactions costs.
• Example: your local grocer reduces the transactions costs of your acquiring vegetables from farmers, milk from diaries, and other products from food manufacturers.

Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page

Questions for Thought:

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15
edition
Gwartney-Stroup
Sobel-Macpherson

1. It takes 1 hr. to travel from New York to D.C. by air, but it takes 5 hrs. by bus. If the air fare is $110 and the bus fare is $70, which is cheaper for someone whose opportunity cost of travel time is $6 per hour? How about for someone whose opportunity cost is $10 per hour? $14 per hour?
2. Consider the choices of women aged 30 to 50 years old with (a) a college education or (b) less than a high school education. In which case will the share of women in the work force be highest? Which will have the higher average number of children? Why?
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