the world, there comes a stop. You and the world cannot have unlimited amounts of books or food. In Figure 1.1 the area marked Unattainable is just that.
Fungibility The diagrammatic way of putting it makes clear that each book is scarce, though it is not the "last" book that uses up the allotment of books. The reason is that the scale treats all books alike. They can be substituted one for the other. They are, to use a strange word popular among economists, fungible. The notion that scarce goods are fungible is surprisingly powerful in applications. The University of Iowa beats the University of Michigan for the Big Ten basketball championship by two points in double overtime, 70 to 68. Whose two points won the game? One's first thought is to look to the last points made. But points are fungible. Any two points can be viewed as the crucial points that make'" the difference between a score of 68 to 68 and 70 to 68. The shot that Weisskoff made in the first 5 minutes of play counts as much as the last. For the purpose of making the score what it is, there is effectively no last, no crucial, point. Consider the following.
comment You have just been given an example of problem solving in economics. The best way to use the problems in the text is to cover the answer with your hand and think about what the answer might be. You must be self-critical in thinking up answers. Suppose you answered so: "The $500 is crucial 'for' the car, because you can pay it to the car dealer." The remark is true so far as it goes, but it does not go far. You aren't getting into the spirit of thinking seriously about fungibility. Give yourself one point out of five possible points and try to think tougher and longer the next time.
Notice that the best "answer" here in fact says that the question is
Q: Your mother gives you $500 toward a new car. If you were going to buy the car anyway, in what sense is her gift crucial "for" the car?
your grocery bills for a while, using other dollar bills to buy the car, would her gift have been any less "for" the car? No. You are made $500 richer and use the money to buy a car. On the other hand, one could say that some other $500, gotten "earlier," was used to buy the car. Since money is fungible, there is no sensible way in which to draw a line between your mother's money and other money.
A: Not at all, or entirely, or partly. The answer is arbitrary because the question is meaningless. You can, if you wish, take the very dollar bills from her gift and pay them to the car dealer. That would be to use them "for" the car. But if you used those dollar bills to pay meaningless. Be on the lookout for meaningless questions: The world tosses up a lot of them, and to think economically you must develop the sense not to try to answer them.
The applications of the idea of fungibility are limitless. In general, when you hear someone speaking of certain points being the reason for a victory, or certain motivations being the reason for a decision, you should suspect that they are ignoring the fungibility of things.
Because of fungibility, the value of the last increment to a pile of things governs the value of the whole. All the things measured along a single axis (tons of wheat, number of books, dollars of income) are taken to be just like any other. Wheat is distinguishable from books, of course. The world is not composed of all-purpose little animals that can be eaten, drunk, used for roofing, woven into cloth, and so forth. The natural extension of the single axis measuring amounts of, say, Books is a second axis measuring amounts of All Other Goods. The expression of scarcity in such a diagram is that the person or the society must stay inside some Attainable area (see Figure 1.2).
To capture the essence of scarcity, the curve bounding the Attainable area need not be smooth. Its shape depends on the methods and resources available for making Books or All Other Goods. For present purposes the only thing important about its shape is that it eventually slopes downward. That is, one cannot in a world of scarce resources consume unlimited amounts of both Books and All Other Goods. For simplicity the next few chapters use straight lines. Economists call these all sorts of things: the transformation curve, the production possibility curve, the Books-All Other Goods trade-off, the production frontier, or simply the budget line.
All Other Goods (tons)
All Other Goods (tons)
Budget Line etc.
Scarcity in Two Dimensions Means Staying Inside One's Budget Line
Only the Attainable area is attainable. Its edge slopes down. That Is, to get more Books, one must give up some All Other Goods if one is on the Budget Line.
Opportunity Cost Is Economists spend a great deal of time thinking about the budget lines facing the Slope of the people and societies. The first thing to notice about a budget line between, Budget Line say, education and other goods is its slope. The slope, or "the rise over the run" (as the phrase in high school algebra puts it), is equal to the decrease in education divided by the increase in other goods. It measures the cost of increasing the amount of one commodity in terms of the consumption of the other goods that is sacrificed. It is the cost of one item in terms of the other. In other words, it measures the opportunity cost of one in terms of the other. Read that all again, slowly: It's important.
The economist's way of measuring the cost of, for example, studying economics one more year is not the pain and suffering involved in the year, it is the maximum amount of other scarce things sacrificed by choosing the additional year. The cost of assembling another automobile is not the sum of physical toil and mental anguish suffered by workers or the sum of their hours of work, or even the sum of their paychecks. It is the output of other things producible by the workers in some alternative employment of their energies. The alternative employment can be in another job that pays a wage, in housework, or in leisure.
T or F: The cost to a student of a year of college is the cost of books, tuition, room, and board.
A: The student sacrifices the highest wage that she could earn if she were employed full time at another job. Books, tuition, room, and board, therefore, are not the only sacrifice. Therefore, false. Notice that to gain a year of education older students typically sacrifice more than do younger students, because the older students can usually earn higher wages. This is one reason (not a very important one) that the years of education are concentrated in youth.
comment Another problem answered. Like many problems in the book, this one is in the True or False form. It could have been put as a question: "What is the cost to a student of a year of college?" Putting it in the T or F way gives you a clearer target to shoot at. And many false statements about economic events come in a form you can easily translate into a T or F question. A rise in tuition proposed for the University of Iowa might be attacked as raising by 10% "the cost" of a year of college from $2000 to $2200. You should try to think of all such remarks as: "T or F: A rise in tuition is a rise in the whole cost of a year of college."
The way to answer the question is to put yourself into it: What would you sacrifice by going to college for a fifth year? What would enter into your decision? Merely the tuition? Wouldn't you also consider the lost opportunity to work at a salary and to use what the salary could buy? Repeat: Put yourself into the situation. Economics is refined common sense. Use your imagination to see into the situation.
Opportunity cost, then, is a result of scarcity. This is represented by the downward slope of the budget line. One must choose, and in choosing you move down the line. Though unpleasant, it is a fact of life. You cannot go to school full time and also work full time. You cannot study economics and also revel to the fullest in the latest album. You cannot go home for Christmas and also go to Fort Lauderdale. To live is to choose, and to choose is to come under the eye of the economist, or of the poet:
Two roads diverged in a yellow wood, And sorry I could not travel both And be one traveler, long I stood And looked down one as far as I could To where it bent in the undergrowth.2
The Slope Is the At a more mundane level, the opportunity cost of a thing is simply its price Relative Price along the budget line, namely, the amount of other things you have to give up to acquire a unit of the thing you are buying.
Q: You go to a bar serving beer at $0.50 a glass and wine at $1.00 a glass. What is the price of wine in terms of beer?
A: Clearly, it is two glasses of beer per glass of wine. One dollar spent on a glass of wine could buy two glasses comment
Q: A Victorian novel takes 20 hours to read; the Classic comic book recounting the same story takes 15 minutes. Considering the time spent, what is the price of novels in terms of comics? (See Figure 1.3.)
Novel hours/comic 1/4
of beer. Notice that, because the question asks for quantities of beer per glass of wine, one divides the given money price of wine by the money price of beer:
glasses of beer dollars/glass of wine
glasses of wine dollars/glass of beer or 0.0125 novel per comic. With two weeks of leisure in which to read 10 hours a day, you could consume 7 Victorian novels or 560 comics,- alternatively, you could trade off 80 of the 560 comics in order to read 1 novel and 560 — 80 = 480 comics, or 2 novels and 560 — 80(2) = 400 comics. In other words, you can consume in two weeks any straight-line combination between 7 novels and 560 comics.
Numerical problems with real numbers are often easier to answer than more abstract problems like the one about the cost of college. Make use of this fact. Use real numbers as examples in an abstract problem. Make them up.
Notice the important point here. The talk has been about how many physical units of one good you give up in order to get a physical unit of another good. You have to realize in this problem that the question asks for physical units— so many glasses of beer per glass of wine. It does not ask for dollars, which is the usual way of speaking of the price. This is elementary, but mildly confusing at the beginning. The currency used does not matter. It can be hours instead of dollars, for instance.
comment You can use the units to check your answer. The "price" of a novel must be some number of the other thing—comics—per novel. So it is.
Recognize that different slopes of budget lines represent different relative prices. Budget line 1984 in Figure 1.4 represents a higher price of books relative to clothes than does 1985. To identify which price has changed, imagine sliding
2 From "The Road Not Taken" from The Poetry of Robert Frost, edited by Edward Connery Lathem. Copyright 1916, © 1969 by Holt, Rinehart and Winston. Copyright 1944 by Robert Frost. Reprinted by permission of Holt, Rinehart and Winston, Publishers. British rights to reprint these lines by permission of fonathan Cape Limited, London.
Victorian Novels Figure 1.3
Victorian Novels Figure 1.3
1985 over to 1985' (read it as "1985 prime"), parallel to 1985 (parallel budget lines have, of course, the same slope and represent, therefore, the same relative price). Starting at the same amount of clothes, Z, you could get more books along 1985' than along 1984. Evidently from 1984 to 1985 books became relatively cheaper (and clothes, of course, relatively more expensive).
Q: Instead of sliding the 1985 line over to point Z, slide it over to Z'. Are books still relatively cheaper in 1985 than in 1984? Explain.
in 1985 than it did the year before. To say that books buy fewer clothes is to say that books have cheapened (clothes have become more expensive).
A: Yes, they are relatively cheaper. The same amount of books (namely, the amount at Z') buys fewer clothes
Summary3 "Scarce" means "desirable but limited in amount." It is natural for economics, the science of scarcity, to assert that scarcity is pervasive. But it is also true. Desirable things are scarce either because they are limited (like sunlight in Sweden in December) or because to get them one must use up resources that could be used to produce other things (like rubber products made from crude oil). Scarcity is expressed as a budget line along which the consumer operates. The slope of a budget line measures the relative price of one item in terms of another. It measures the rate at which one item can be substituted for another. In other words, it measures the opportunity cost of one item, that is, the amount of the other item sacrificed. As the slope changes, the opportunity cost or relative price changes.
EXERCISES FOR SECTION l.V
1. True or false: Friendship is scarce because it is costly in time forgone making friends.
2. A sportswriter describes a certain play at second base as "the turning point" of a game. Does the description survive the idea of fungibility?
3. Notice on an elevator: "Occupancy by more than 15 people is dangerous and unlawful." An elevator with 15 people stops at the third floor on the way up. Carl Mosk gets on and no one else gets off. Who is the criminal? Really? Couldn't someone else have gotten off?
4. Opportunity cost is related to choice. Suppose that the world were made up of only one all-purpose good called a shmoo (that can be eaten, drunk, used for roofing, sewn into cloth, and so forth). True or false: In such a world shmoos could be scarce, but opportunity cost would mean nothing.
5. True or false: The cost of a week of vacation is simply the money cost of the hotel, the plane, food, and so forth.
6. What is the price of the item in the first column relative to the corresponding price in the second column? Be sure to express the prices in the correct units. The prices are historically accurate. You might find it interesting to reflect on what the relative prices would be today.
3 The Summary paragraphs put the gist of the section in slightly different words than the text used. Later you should read all the old Summaries in sequence. It's a good way to review the larger structure of the book. A reminder: A good way to review the section is to answer the What to Read For questions at the beginning.
4 The Exercises are pretty easy problems that require you only to apply the reasoning of the sections, in the same order as it was developed. The Problems go further, and are usually more difficult and less directly linked to the section. At first you will miss even some of the Exercises, and the Problems will be impossibly difficult. Stick with it. The Exercises and Problems may seem at first "vague and unfair" to students who are accustomed to multiple-choice questions. They will find that life is vague and unfair. Might as well get used to it: The world, alas, does not come in multiple-choice questions.
Prices in England in the 1400s
Second Column a. Bread, J pence per 2-pound loaf b. Wine, 1 j pence per quart c. Bailiff, 344 pence per year d. Female servant, 1 68 pence per year e. Fat sheep, 1 2 pence f. One acre of good plowing land,
Bricklayer, 6 pence per day
Ale, | pence per quart
Shepherd, 300 pence per year
Agricultural worker, 300 pence per year
Bullock, 60 pence
Plumber, 6 pence per day for a year, 3 pence
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