Economists Measure in Opportunity Cost,

¶ … Economists Measure in Opportunity Cost, not Dollar Cost

Give an example from your community or outside your community of a dispute over the opportunity cost of the use of resources.

A seventeen-year-old can buy a new car -- but must sacrifice the opportunity cost of the college savings lost in doing so, which may prohibit him or her from going to the best college possible. An opportunity cost is the "cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action" ("Opportunity cost," 2007, Investopeida). Education in general involves certain opportunity costs, like the opportunity cost of the full-time wages a student could have earned during the four years he or she spends in college, although to forgo college early on has an opportunity cost of losing a resume-building and networking opportunity at the beginning of one's working career.

Another example of how opportunity costs are inevitable in a world if finite resources can be found in my community. A local, private university wishes to buy more community owned land to expand its facilities. The college argues that students come to the college, inject funds into the local economy when they buy goods and services, and that the college is an asset because it offers educational and recreational facilities to all community members, not just students. However, many residents point out that the college does not pay taxes like a for-profit business might, and that the students are often rowdy and disruptive at night, which brings down the property value of the houses nearby. Also, unlike residents, the students are transient, and do not give back to the community other than occasional efforts by service organizations.

The land in question cannot accommodate an expanded university, more houses, and a for-profit business. There are opportunity costs of jobs to some residents if houses are put there, as people who could be employed by a business or even the school will not get jobs. There is an opportunity cost in terms of property values if the area becomes commercial or educationally zoned. There is even an opportunity cost of community prestige if the school does not exercise its ability to expand.

Explain in detail and give examples of HOW the market economy answers the following 3 basic questions that every economic system must answer: a. what goods are going to be produced? b. How will the economy make sure goods are produced efficiently? c. How will the economy decide who gets the goods and how much?

To sell goods in a market economy, a supplier must meet consumers' demand for goods and services, within the bounds of his or her production resources. Consumers are willing to allocate their own scarce funds to buy certain goods for a variety of reasons, to meet their needs and desires. The consumer is willing to buy goods within a certain price range, depending on his or her lifestyle and values, and given the input costs of production, the supplier will meet that demand. As the price is negotiated over time, gradually the market for a particular good or service will reach a state of equilibrium, or a state of efficiency, where the supplier is making enough of a profit to make more goods and stay in business, and the consumer can afford those goods, given the wage structure of the nation. Efficiency is achieved because producers have an incentive to minimize input costs to maximize profits, and allocation of resources is dependant upon who is willing to pay the greatest amount of money for a particular good or service, and how great a need, desire, and financial resources consumers have to purchase goods.

Explain in detail why competition is the regulatory mechanism in a market economy. Give an example of this concept.

Why can't producers charge exorbitant rates for products? Because an enterprising producer will step in instead, and provide similar goods at more competitive, cheaper prices. or, a producer might provide a more expensive good that is longer-lasting or of higher quality. "If consumers stop buying, or if they decide to spend less on a product -- for whatever reason -- prices will drop. If they buy more, increasing demand, the price will rise" ("Consumers in a market economy," 2007, U.S. State Department). An example of this can be seen in the phenomenon of substitute goods. For example, if apple prices are higher than orange prices, consumers are likely to buy more oranges, since the fruits are virtually substitute goods for one another. So long as the apple growers can still make a profit, they will very likely lower their prices to meet consumer demand, until demand for apples increases again. Another example is that of gas prices. While gas 'gouging' certainly exists, it is difficult for one gas station to have prohibitively high costs for its product than other nearby suppliers, given that consumers will vote with their dollars and go to the more inexpensive station right down the highway.

Fully explain what is meant by the concept of transfer payments and how the government uses transfer payments to redistribute income in society. Give a concrete example of how the government is doing this.

Transfer payments are often thought of as the government taxing the wealthy to redistribute income to the poor. This concept is evident in how the U.S. government taxes wealthier individuals at a higher rate to pay for programs such as Medicare and Medicaid that provide services for the impoverished members of society. However, transfer payments also include other forms of money given by the government to its citizens, such as Social Security. In this program, younger individuals have money taken out of their paychecks to pay for aid for the retired elderly. Then, later on, according to the system, these same individuals will receive similar aid when they are retired, from other working young people ("Transfer payments," 2007, Investor Words). But the payment is in proportion to the money the worker 'pays in' to the system, in other words, how high his or her wages were while working, and how long he or she worked.

Other examples of transfer payments include unemployment compensation, where the unemployed receive benefits provided by working members of society. While they were working, or when they worked, they paid taxes to support this program, which exists as a way to keep all of society afloat, weak and strong. Welfare and disability payments are also transfer payments. Individuals pay for these programs through their taxes to support the ideal that society as a whole is stronger if people are not suffering. If people have some hope to better their futures they will be able to pay 'back' into the system (if they have not already) in the form of wages when they 'get on their feet' again ("Transfer payments," 2007, Investor Words).