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Economic Scarcity

We must make choices

Opportunity Cost:

Fundamental Tool in the Economic Way of Thinking

The value of the forgone alternative.

To identify the opp cost of a decision, think about:

What is given up.

What is the opp cost of …

1. The Donated Blood of College Students

The blood itself not the process of giving blood.

Opp Cost of Donated Blood: value of blood in the body

That’s the next best use of donated blood. That’s what’s given up.

Opp Cost of Donated Blood (DB)

Athletes

Students

In-Season Out of Season

Late in Semester Early in Semester

>

>

Would athletes ever donate blood in-season?

cross country team’s response to Sept 11th

“We went over the pros and cons” of giving blood and most team members decided to do so.

—Senior Clay See

Giving blood is a “sensitive subject,” because “red blood cells carry oxygen to your muscles, and it takes about three weeks to recover."

—Senior Tommy Jager

It is rational to incur great costs, if the benefits of doing so are even greater.

I hope you appreciate that each “walk” costs

$175 of my billable time.

I hope you appreciate that I’m your only

friend.

What is the opp cost of…

2. Cadaveric kidneys from Hmong Bodies?

Hmong believe that if people lose “vital organs after death, their souls cannot be reborn into new bodies”

The opp cost of donated Hmong kidneys

= value of donors’ future lives

= a lot of $!

The opp cost of donating my kidneys after my death

= value of cremating them= $0

What is the opp cost of…3. Milk?

Milk

2 %½ gallon

What’s given up to produce milk?

Resources—Labor (L), Capital (K) and Natural Resources (N)

OC Milk = value of the resources used to produce it.

Time of dairy farmers

Milking machines Land

Cows ~ mix of natural resource and capital

Market Prices Reflect Opp

Costs?

And, hence, can be used to measure opp cost

Donated Blood

No

Milk Yes

Why?

produced and traded in competitive markets

produced and traded outside of markets

PB paid by Red Cross ≠ OCDB= 0

What is the opp cost of…

Milk

2 %½ gallon

Concentrated Animal Feeding Operation:Cows live in feedlots, eating corn and soybeans, and are milked three times a day.

CAFO Milk

Milk

2 %

Cows graze in pastures, eating grass or hay, and are milked twice a day

Organic Milk

Pasture-Fed Cows:

Milk

2 %½ gallon

CAFO Milk

because pasture-based methods use twice as many cows and much more land to produce the same amount of land, i.e.,

$1.79 half gallon

POrganic Milk ≈ 2 PCAFO Milk

Milk

2 %Organic

Milk

$3.19 half gallon

Opp CostOrganic Milk ≈ 2 Opp CostCAFO Milk

Hence, in competitive markets, prices reflect opportunity costs!

The owner of Snowville Creamery, Warren Taylor,

Warren Taylor

boasts that organic milk tastes better than CAFO milk. He argues that the benefits of better tasting milk are worth the extra cost for many consumers.

Does organic milk really taste better than CAFO milk?

Positive versus Normative Economics

Positive Economics: understanding how the economy works and the impact of public policies.

judgments about the desirability of econ events and public policies.

Normative Economics:

positive statements are provable given ideal evidence.

Distinguishing Test:

Too late to put on your helmet

Most motorcycle deaths are a result of head injuries. Wearing a motorcycle helmet correctly can cut the risk of death by almost 40% and the risk of severe injury by 70%. Be Part of the Solution: wear a helmet.

Do Motorcycle Helmets Save Lives?

World Health Organization claims:

“Wearing a motorcycle helmet correctly can cut the risk of death by almost 40%”

24,128 helmet

16,247 no helmet

94.8% died

96.2% died

40,375 crashes involved 1

rider

52,930 Fatal Motorcycle Accidents, 1994-2008

To be included in FARS, someone had to have died. The comparison below underestimates the benefits of helmets because helmets aren’t getting credit for keeping people out of FARS. Economists call this a selection bias.

FATALITY ANALYSIS REPORTING SYSTEM

52,930 Fatal Motorcycle Accidents, 1994-2008

5736 both helmets

6203neither helmets

57.4% died 57.3% died

This comparison suffers from selection bias and from differences in the conditions of the crashes.

Double Riders

Both Helmeted

Neither Helmeted

Night (10pm-6am) 20.1% 30.1%

Speed Limit > 54 mph 50.0% 43.7%

Blood Alcohol = 0.08+ 10.9% 19.9%

12,555 crashes involved2 riders

52,930 Fatal Motorcycle Accidents, 1994-2008

5736 both

helmets 6203neither helmets

57.4% died 57.3% died

616helmet

616 no helmet

616 crashes—only 1 rider wore helmet

12,555 crashes involved2 riders

44.0% died 69.8% died

↓ 25.8 % point =

25.8

69.8* 100 =__ 37%

Too late to put on your helmet

Most motorcycle deaths are a result of head injuries. Wearing a motorcycle helmet correctly can cut the risk of death by almost 40% and the risk of severe injury by 70%. Be Part of the Solution: wear a helmet.

“Wearing a motorcycle helmet correctly can cut the risk of death by almost 40%”

Do Mandatory Helmet Laws Save Lives?

Do Motorcycle Helmets Save Lives? Positive Question

Positive Question

Florida repealed its universal helmet law in 2000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080

5

10

15

20

25

30

35

Repealed Helmet Law Florida

Motorcycle Deaths per

Million People

Do Mandatory Helmet Laws Save Lives?

Do Motorcycle Helmets Save Lives? Positive Question

Positive Question

Florida repealed its universal helmet law in 2000

Repealed Helmet Law Florida

States with no Δs in helmet laws

Motorcycle Deaths per

Million People

More states should enact universal helmet laws since wearing helmets save lives.

Normative statement because it rests on value judgments, weighing enhanced safety against the freedom of adults to choose to engage in risky behavior.

US motorcycle helmet laws, 2009

Mandatory Helmet Law

Teenagers Must Wear Helmets

No Law