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Economics in Two Lessons, Chapter 5

March 17th, 2018

Thanks to everyone who the first four chapters of my book, Economics in Two Lessons. I’m continuing with policy applications of Lesson 1: Market prices reflect and determine opportunity costs faced by consumers and producers.
That will be followed by Lesson 2: Market prices don’t reflect all the opportunity costs we face as a society.

Now here’s the draft of Chapter 5. Again, I welcome comments, criticism and encouragement.

The book so far is available
Table of Contents
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
draft of Chapter 4:Lesson 1: Applications.

Feel free to make further comments on these chapters if you wish.

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  1. Greg McKenzie
    March 18th, 2018 at 08:19 | #1

    The link between opportunity cost and wealth is crucial. Economics is fundamentally a study of the “physics” of CHOICE. Opportunity cost calculations are made by the buyer, or are made for them by the seller, based on perceived notions of wealth ownership. So when a buyer sees their wealth rise they become open to more choices and likely to take more risks in decision making. This “wealth effect” has been pointed out before and is pertinent to today’s markets. Higher real estate values added to lower inflation rates increases real wealth. This means that buyers ‘feel’ more wealthy. This will alter their perceptions of opportunity cost for each purchase decision they may take.

  2. Robert Banks
    March 19th, 2018 at 10:08 | #2

    John – just read Chapter 3 and it occurred to me that the Real Options approach used in investment appraisal, is a method that formalises the consideration of opportunity costs.

    And on agriculture, James Scott seems to have extended the perspective of Jared Diamond to include or maybe just stress some more opportunity costs, particular around inequality http://blogs.lse.ac.uk/lsereviewofbooks/2017/10/30/book-review-against-the-grain-by-james-c-scott/.

  3. Harold
    March 20th, 2018 at 03:10 | #3

    Just read Chapter 5 and thought it was a very clear explanation. It would be helped perhaps by a concluding section summarising the common conclusions from each if the sub-sections.

  4. John Quiggin
    March 22nd, 2018 at 10:55 | #4

    Thanks for all these comments. I’ll deal with wealth later. Scott is certainly a worthwhile read, so I’ll add him. The idea of a concluding section is also good.

  5. Nigel Harden
    March 23rd, 2018 at 18:20 | #5

    P. 11 First line there is a syntactical error.

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