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Office hours tomorrow 1:00 – 3:00. Economic Scarcity We must make choices  Opportunity Cost: Fundamental Tool in the Economic Way of Thinking The value.

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Presentation on theme: "Office hours tomorrow 1:00 – 3:00. Economic Scarcity We must make choices  Opportunity Cost: Fundamental Tool in the Economic Way of Thinking The value."— Presentation transcript:

1 Office hours tomorrow 1:00 – 3:00

2 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.

3 What is the opp cost of … 1. The Donated Blood of College Students The blood itself not the process of giving blood.

4 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-SeasonOut of Season Late in SemesterEarly in Semester > > Would athletes ever donate blood in-season?

5 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.

6 I hope you appreciate that each “walk” costs $175 of my billable time. I hope you appreciate that I’m your only friend.

7 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

8 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

9 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 P B paid by Red Cross≠ OC DB = 0

10 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:

11 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 P Organic Milk ≈ 2 P CAFO Milk Milk 2 % Organic Milk $3.19 half gallon Opp Cost Organic Milk ≈ 2 Opp Cost CAFO Milk Hence, in competitive markets, prices reflect opportunity costs!

12 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?

13 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:

14 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%”

15 24,128 helmet 16,247 no helmet 94.8% died 96.2% died 40,375 crashes involved 1 rider 52,930 Fatal Motorcycle Accidents, 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

16 52,930 Fatal Motorcycle Accidents, both helmets 6203 neither helmets 57.4% died57.3% 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 mph50.0%43.7% Blood Alcohol = %19.9% 12,555 crashes involved 2 riders

17 52,930 Fatal Motorcycle Accidents, both helmets 6203 neither helmets 57.4% died 57.3% died 616 helmet 616 no helmet 616 crashes—only 1 rider wore helmet 12,555 crashes involved 2 riders 44.0% died69.8% died ↓ 25.8 % point = * 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%”

18 Do Mandatory Helmet Laws Save Lives? Do Motorcycle Helmets Save Lives?Positive Question Florida repealed its universal helmet law in 2000 Repealed Helmet Law Florida Motorcycle Deaths per Million People

19 Do Mandatory Helmet Laws Save Lives? Do Motorcycle Helmets Save Lives?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

20 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.

21 US motorcycle helmet laws, 2009 Mandatory Helmet Law Teenagers Must Wear Helmets No Law


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