Social Studies skills: Difference between revisions - A+ Club Lesson Planner & Study Guide

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===Opportunity Cost===

* Definition: The value of the next best choice one had when making a decision.

** i.e., the trade-off of a decision.

** Opportunity cost is a way of measuring your decisions: if I do this, would having done something else been more or less expensive? What did I give up in my decision?

** Examples:

* Frederic Bastiat developed the "Parable of the broken window" to express the concept

*** If you own land on an urban road, and you decide to build condos on it, what else might you have done, and what would that have cost -- or earned -- for you?

** from his essay, "''Ce qu'on voit et ce qu'on ne voit pas"'' ("What is seen and what is not seen")

** Questions:

** the parable discusses the "unseen" costs of fixing a broken window

*** If the U.S. imports oil from Saudi Arabia, is the U.S. giving up the potential of its own oil industry?

*** even though the broken window provides benefit to a "glazier" makes money fixing it

*** If Saudi Arabia relies on oil, what is the cost of that reliance?

*** the shopkeeper suffers the "unseen" costs of not being to do something else with that money

*** additionally, the opporutnities to fix broken windows may create an "unintended consequence" of a "perverse incentive" for glaziers to go about breaking windows in order to make money fixing them

click EXPAND for a review of Bastiat's theory of "opportunity cost" and associated concepts of "unintended consequences" and "perverse incentives"

* ''Parable of the broken window'':

** a shopkeeper has a careless son breaks a window

*** his neighbors argue that broken windows keep "glaziers" (window-makers) in business

**** if it costs 6 francs to fix, they argue, the money spent on the window is productive, as it goes to the glaziers

*** Bastiat replies that, yes, money has thus circulated, but "it takes no account of what is not seen" (''ce qu'on ne voit pas)''

**** the shopkeeper can't spend those 6 francs on something else of his choosing

**** or, perhaps, he has another need for 6 francs that he can not now fix

**** therefore the accident of the broken window prevents the shopkeeper from using his money more efficiently

*** Bastiat writes, "Society loses the value of things which are uselessly destroyed"

*** the parable also develops "the law of unintended consequences"

**** ex.: if the glaziers figure out they can pay a boy 1 franc to break windows, and they can still make a profit at 5 francs per window,

***** there will thereby exist a "perverse" incentive to break windows

****** "perverse incentive" = an incentive that produces a negative outcome

** economists have argued over the "opportunity costs" of

*** disasters (hurricanes, earthquakes which require repair and thus create jobs & economic activity)

*** wars (spur economic activity and mobilization)

** however, whatever the benefit it does not account for Bastiat's "unseen" costs and cannot in any way outweigh the suffering, death and loss of choice created by the disaster or war

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* Examples:

** If you own land on an urban road, and you decide to build condos on it, what else might you have done, and what would that have cost -- or earned -- for you?

* Questions:

** If the U.S. imports oil from Saudi Arabia, is the U.S. giving up the potential of its own oil industry?

** If Saudi Arabia relies on oil, what is the cost of that reliance?

=== Herbert Stein's Law ===