ENGR 3360U Winter 2012

Unit 2.1.2
Microeconomics: Common Economic Blunders
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-01

Unit 2.1 Introduction to Microeconomics

2.1.2 3 Blunders in Economic Estimation

1. Ignoring Opportunity Costs
2. Failure to Ignore Sunk Costs
3. Failure to understand the difference
between average and marginal costs

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

1. Ignoring Opportunity Costs

You are scheduled to work at MacDonalds for
Saturday. Your best buddy wants you to go deerhunting up at Bobcageon instead. He argues that
you will get 100 pounds of venison, saving you a
lot in beef costs ($3/pd). Alas the probability of
getting a deer is 1 in 5.
The OC are $10x12 hours = $120.
ES =(3)(100)/5 - 120 = -$60! Dont do it!
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

2. Failure to Ignore Sunk Costs

Sunk costs are irretrievable costs.
You buy a ticket to hear Broccoli Spears in
TO through Ticketron for $200. That is a sunk
cost (assuming that you do not scalp it)
You are offered the chance to flip burgers at
MikeyDs at the same time for $60.
Your OC is $60 (not $200+60) because the
$200 is sunk
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

3. Failure to understand the average

and marginal cost distinction
Marginal cost is the increase in cost
resulting in doing one additional unit of
activity
Marginal benefit ditto
Example NASA now launches 4 flights per
year. The estimated benefits are $6G per
launch
Should they launch a 5th?
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

NASA Data
Launches
1
2
3
4
5

Total Cost
6Gig
8Gig
12Gig
20Gig
30Gig

Ave Marg ES
6
6
0
4
2
4
4
4
6
5
8
4
6 10
0
ES = Economic Surplus

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Fixed and Variable Costs

Be sure not to confuse them
Joining GoodLife costs $100 annual fee
plus $25/month
If the fee is non-refundable, it is a fixed and
sunk cost
If it is refundable, it is only fixed.
All sunk costs are fixed; not necessarily the
reverse
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

2.1.3 Production Possibilities

2.1.3.1 Exchange and Opportunity Cost
2.1.3.2 Production Possibilities
2.1.3.3 Comparative Advantage and
International Trade

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

2.1.3.1 Exchange and Opportunity Cost

When two or more entities have different
opportunity costs for performing different
tasks, they can increase the total value of
goods and services by trading with each
other
Principle of Comparative Advantage
[total output is largest when each entity
concentrates on the activities for which their
OC is lowest]
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Frick and Frack

Activity A Activity B
Frick
20min
10min
Frack 30min
30min
As OC
Frick
2.0Bs
Frack
1.0Bs
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Bs OC
0.5As
1.0As

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Specialization Advantage
The boss mandates exactly 16 units of A must be done in 8 hrs.

Without Specialization
A Time A Units B Time
B Units
Frick
4h
12
4h
24
Frack 2h
4
6h
12
Total Output
16
36
Specialization
Frick
0h
0
8h
48
Frack 8h
16
0h
0
Total Output
16
48
NetGain
0
12
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2014-I-01

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco