so we're going to start the second part of core principles last class I started with a question what is economics well today I'm going to start with a question what is microeconomics that's what this course is microeconomics so in order to learn about microeconomics we want to differentiate between microeconomics and macroeconomics so microeconomics deals with individual households and markets so micro smaller level macroeconomics examines the entire economy of a society macro big uh it's good to remember these definitions are somewhat subjective so if we're looking at a couple of markets it's probably still microeconomics so when you see these uh slides in pink that is a question that in my in-person classes we call it a top hat question so it's a clicker question for you obviously there's no need to click I do recommend you actually answer the questions which means that if you watch the video pause it work it out and then see what the answer is so for each topic determine if it is best categorized as microeconomics or macroeconomics the impact so first the impact of a federal income tax cut on employment and wages that macro or micro so that is an example of macroeconomics it's a big picture right import income taxes in fact affect everyone who works they affect every sector every business of the economy next one whether increasing the gasoline tax will result in more people bicycling to Bork macroeconomics microeconomics or microeconomics that's about as good as the jokes get here just don't want to don't want you to be thinking if you're going to get any funnier class that you've gotten so far so the answer here is B this is microeconomics um because we're looking at a very specific um thing which is people bicycling to work if we were trying to figure out the effect of gasoline tax on overall employment or something like that then maybe that would be that would be closer to macro but we're thinking about one very specific question a very small question is specific way of getting yourself to work this is microeconomics okay all right so that was a little bit of an aside um we're gonna now resume talking about the four core principles of good decision making last class we talked about cost benefit principle today we are going to talk about the opportunity cost principle and usually what I one of the things I tell people is that I teach a lot I teach a lot of important things um I like to think that I do I think what we're doing is cool and I think it's important but the most important lecture I say is the second one which is this one and that's because this is the class we talk about opportunity cost so let's think about a situation you are considering two options for your housing next year you could live in a one-bedroom apartment in Lansing for 600 in East Lansing for 650 a month so be closer to school or you could live with your parents 30 minutes from school for free when you make this choice you will likely be thinking more about more than price you're not just saying 650 versus zero so you're gonna be thinking about privacy commute time maybe your parents are nice and we'll provide you with cooking and laundry services maybe your parents will deliver regular lectures about the way you should be studying and they may require you to do some chores all of these are things that could come into your mind when you're making the decision this is important to note the cost of living with your parents is not zero anyone who has lived with their parents in adulthood could tell you the cost of living with them is definitely not zero there may be no Financial costs you uh you know may not be having the right to give one of your parents a check for rent the cost is not zero the cost of living with your parents is you will not be living in an apartment so what your the cost of living their parents is you are giving up this opportunity to live in the apartment you will not have the privacy and short commute that the apartment would allow think about what that means if you spend an hour commuting each day that is an hour that you cannot spend studying or working right so we're thinking about that as they cost you me again you're not writing out a check to somebody but you are giving up an hour's worth of doing something other than driving right you're having to spend that hour driving or taking the bus or whatever so this is the um most important thing to learn the true cost of something is what you give up to get it a couple ways to um a couple other ways that that's defined that we define opportunity cost one is the best option not chosen so if all the places you could have lived right we're gonna say that you got it down to those two options live with live with your parents live um in the apartment in East Lansing right there might be some other option where you can go live in your grandma's house three hours away or you can go you know live in another country or something but none of those are appealing to you as someone who is attending MSU right you know you're attending MSU you're just trying to figure out where to live so we only have to think about the best option not chosen which just means you just kind of just need to narrow it down to two right I'm going to live here or if I couldn't have lived with my parents then I would have lived in the apartment or if I couldn't have lived in the apartment if you know it had fallen apart at the last minute I would have lived with my parents um the way the authors of the book say is or what so this is the question to ask anytime you're trying to figure out the opportunity cost of something you say or what so the opportunity cost of living with your parents you're going to live with your parents or what or rent an apartment so the opportunity cost principle the true cost of something is the most valuable alternative you must give up to get it your decisions should reflect this opportunity cost rather than just the out-of-pocket Financial costs opportunity costs exist because resources are limited something we've learned many times already we have limited money you have limited time you have limited attention so Mark Zuckerberg you know very funny guy posted on his on Instagram or something um said first day back after paternity leave what should I wear and you see all he has are a bunch of gray t-shirts and a bunch of great hoodies which is what he's known for wearing and he's at one point he explained that this was not just because he had no fashion sense it is because there's research that showed that you actually can kind of get decision fatigue that when you have to make lots and lots of decisions you get tired of it by the end of the day you're not wanting to spend any time making them you may decisions aren't as good and his idea was that you know what I'm going to spare myself the little bit of deciding that comes when you have to pick a shirt so I'm just going to always wear the same shirts because you have limited attention so let's think about the opportunity cost of graduate school so um I got this I believe it's right from the textbook um this is someone named Narita who is thinking about getting what if she doesn't pursue the MBA that's going to be the cost of her next best alternative the or what the best option not chosen which is she could continue to work full-time at her job so what happens is that well she won't have to pay tuition instead of spending money on tuition she'll earn 70 000 from her job she'll she still has to live somewhere she still has to eat something so her rented meals will cost twenty four thousand dollars and she'll spend 10 hours per day working so well we can do then is the cost of her choice minus the cost of the next best alternative is going to get us to her opportunity cost so let's see how we do that arithmetic here so if what are the costs of going to graduate school one is the sixty thousand dollars in tuition then she's also losing out on Seventy thousand in income again that's not a check she's writing but it is a bunch of paycheck she's not going to get because she's in school um when it comes to room and board what we're going to see is she has no opportunity cost here because no matter what she has to live somewhere she has to eat something so no opportunity costs from that also no opportunity cost from this hour spent studying because she's going to spend those 10 hours studying or working she's going to spend them doing you know some sort of working either way that's 10 hours a day that she's not hanging out with her friends so we don't have to think about an opportunity cost there so when we think about her total opportunity cost we come to a hundred and thirty thousand dollars the 60 000 in tuition plus the seventy thousand dollars in foregone income so this brings us back to that Cliffhanger we had last class if you remember I said that it looks like um lots of colleges would give you benefits greater than costs so why is it that you wound up at MSU and not going to 10 different colleges so how did you choose MSU from all of your options well important to know the cost of choosing another school isn't just tuition right the cost of going to a graduate school in for Dorito wasn't just tuition it was what she was giving up similarly for you the opportunity cost of attending a different school is that you cannot attend MSU at the same time likely so for you the opportunity cost of MSU is the fact that you can't go to another school right for you if you were to have gone to Eastern Michigan the go to Eastern Michigan or what the or what was to go to MSU the fact that you lined up wound up here makes me think that that's something that would have had a high opportunity cost you had a lot of value in coming here and you have had to give up a lot to go somewhere else once you factor an opportunity cost at which point all these other schools their costs look a lot higher once you've done that only MSU has benefits greater than costs all right so uh one of the things I tell people is when I start teaching is that actually LeBron James and I have a lot in common um should I decide to get some tattoos he and I could actually have some of the same tattoos so um on his his arm here is um 330 which is the area code for Akron where he was born also the area code for where I was born outside of Akron uh right there and is his R his shoulder it says established 1984. I was also born in 1984. those are mostly where our similarities end uh and it happened that um when he was risk you know resigning Cleveland it was like 2014 or so um he there were lots of news people sort of circling his house in helicopters and things like that he kind of felt bad for the Neighbors um that they were having to deal with all the helicopters and so he bought them all cupcakes and then it came out in the news that LeBron James is a big fan of cupcakes whatever that means I don't know if he really likes eating them or he likes to make them for fun or what but it came out that he was really into cupcakes and let's suppose that LeBron's business partners because they find out he's really into cupcakes they create a business plan do some market research and they determined that if LeBron James opens a cupcake ring I don't know if that's and is the head chef this store will earn a million dollars per year wow that sounds great right if you think he'd be good at it he's been good at pretty much everything he's got himself into so maybe you know we can earn a million dollars a year at this Bakery should LeBron do this well I think most of us would agree that probably who should not the reason is is because he's making uh around 39 million dollars a year from the Lakers and obviously if you were to decide he wanted to be a full-time uh pastry chef then he would have to give up his 39 million dollars in salary obviously that 39 million dollars in salary is way bigger than the million dollars he would earn from the bakery so what that means is if you are LeBron you're thinking about starting this business you got he's got to remember that the or what for him is he's going to be a baker or make 39 million dollars a year playing basketball and so if you're an entrepreneur when you're thinking about starting a new business you have to ask should I start a new business or stay in my existing job those foregone wages are an opportunity cost right chances are if you're going to start off as an entrepreneur you're not going to have a really steady reliable income at first and so you're giving up a job where you probably are earning a more steady reliable salary the other thing that that businesses require in addition to your time is they require money and so you want to think about should I invest my money in a new business or should I put it somewhere else right so let's say this new business is going to cost ten thousand dollars to start you have ten thousand dollars what you want to think about is do I want to put the ten thousand dollars in the new business or put in the stock market invest in my friend's new business put in a bank and earn some interest those are all things you have to think about because those foregone investment opportunities are in an opportunity cost so that's I'm going to invest in my business or invest in something else another important thing to learn about are sump costs sub costs are costs you have already incurred that cannot be reversed sort of it's happened in the past there's nothing you can do about it so let's suppose you pay ten dollars to see the new Avengers movie 30 minutes in you've decided that it's horrible should you stay well one of the um the reason I bring this up as an example is what you might be thinking is I pay ten dollars to see this movie do I really want to walk out and just lose all that money well what you want to think about is you want to stay there in the movie or what well the or what is get up and leave right the or what is not get up and leave and get your money back that money he's paid for the ticket is gone you moving the theater is not going to refund your money because the movie was bad once you've paid for the ticket the only thing you're giving up by leaving the movie is the time spent watching a movie you hate right so it's actually or what is I'm gonna sit here and watch the last hour and a half of a movie I hate or what or I'm gonna leave and go do something I actually enjoyed some costs we said they're a cost you have already incurred that cannot be reversed some costs are not opportunity costs so there's no or what there because no matter what you have to pay them you've already paid them uh the opportunity cost principle says you should ignore some costs all right that's the end of our second lecture thanks again and we will pick it up next class and continue talking about those four core principles