Why Study Economics?Economic problems are an ever-present and inherent part of our lives: the existence of high levels of unemployment, global competition in world markets, arguments about the wisdom of free trade agreements, the merits of alternative pollution control policies, and the Bank of Canada's forceful endeavours to restrain inflation. While many issues are fundamentally economic in nature, there are many other social, political and environmental problems that have important economic consequences. The social science of economics is our attempt to analyze and understand these and many other problems. More formally, economics is concerned with the material well-being of human societies. It is often described as the study of how we use our limited resources to satisfy our unlimited material wants. An extensive body of analysis has developed to do that.There are many reasons for studying economics. First, economics is essential to understanding the world in which you live and work. What determines the prices of the goods and services on which you spend your income, and the prices of the stocks and bonds in which you invest your savings? How does education affect the lifetime earnings of people? Why do some people earn so much and others so little? Why do some jobs pay high wages while other jobs pay low wages? How do firms operating in different market environments decide what quantities to produce of their product outputs, what prices to charge for these outputs, and what quantities of labour and capital inputs to employ? How can economic analysis help us understand and solve the problems of environmental pollution and resource depletion? What determines the level of national income and aggregate employment, the rate of price inflation, the rate of unemployment, the rate of growth of aggregate output and productivity, and the international value of the Canadian dollar? Why do average standards of living vary so widely among and within countries?A second reason to study economics is that it can equip you to participate more successfully in the increasingly knowledge-based and interdependent global economy of the twenty-first century. Economics is fundamentally about choice behaviour -- about how individuals, families, firms and governments deploy their scarce resources so as to maximize the economic well-being of their stakeholders. How do individuals decide how much of their time to devote to paid work, how much and what kinds of formal education to acquire, how much of their incomes to spend and save, how to allocate their spending among the vast array of consumer goods and services, how to invest their savings, and how much to invest in home ownership? By systematically addressing these sorts of questions, economics can help individuals make better purchasing, employment and financial decisions. And by providing in-depth analysis of firms' decision-making in a variety of market settings, economics can help business managers and executives make better production, employment and investment decisions.A third reason to study economics is that it can give you a better understanding of the objectives, methods and limitations of government economic policy. How can government policy help reduce environmental pollution? How does the tax system affect the incentives for people to work, for families to spend and save, and for firms to invest? How do government budget deficits and debt affect the economy? What are the effects of freer international trade on Canadians' standard of living? How do the actions and policies of the Bank of Canada affect interest rates and the money supply, and thence the rate of price inflation, the external value of the Canadian dollar, and international capital flows? How can governments enhance the competitiveness of domestic markets and the international competitiveness of Canadian firms? Can Canada afford in their present form the country's large social welfare programs such as Medicare and the Canada Pension Plan?

Top 10 Reasons for studying EconomicsShould I study Economics? Here are 10 absolutely foolproof reasons for studying economics.

1. Economic Forecaster.

As an economist you can make a living from predicting future economic events. The key to being a good economic forecaster is to use a mixture of dice and lottery numbers. (some economists make the mistake of using just lottery numbers, but this can lead to really bad forecasting) If this method fails just use the statistics from the previous year; they are always more accurate than the actual predictions of economists.Note: Economists have successfully predicted 10 out of the last 2 recessions.

2. You can always give advice.

When the economy enters a recession, you will be able to tell everybody why the economy is in a recession. Also, you will be able to suggest several conflicting reasons as to how we can get out of a recession. This will simultaneously, both confuse and impress everybody; but it doesn't matter because nobody ever listen to economists.

3. Diminishing Returns.

When you get ill from drinking 10 pints of beer in one night, you will be able to impress your parents with the knowledge that the law of diminishing returns is actually perfectly correct. As a side effect, you may also learn about opportunity cost:Spending £40 on drink equals hangover.

4. Rational Behavior.

Economics assumes people are rational. Economics assumes that people choose the activity which optimises our utility. When people want to buy a season ticket to watch Leeds United, you can tell them this is irrational behaviour. However, the Leeds United supporter will definitely appreciate the cogency of your economic reasoning and will, more than likely, start supporting Doncaster Rovers with immediate effect.

5. Economics is a very humorous subject.

Did you know that you can rearrange Economics to get "comic nose". If, this alone, was not sufficient proof of the hilarity endemic in the subject of Economics, try these economics jokes:How many Free Market economists does it take to change a light bulb? None, in the long run, it will change of its own accord.How many Marxists does it take to change a light bulb? None, smash the light bulb, a light bulb is a mere representation of the capitalist ideology that gives a feeble light, rather than the True source which is the sun.

6. Economics gets you a high paid job.

Actually, this is the only reason people study economics. Unless of course you have a strange desire to be an economics teacher; in which case you will enjoy your students repeatedly asking you the question; "Why didn't you get a proper job in the city, Sir?"

7. It's better than studying Geography.

True, but purists may argue this doesn't prove very much.

8. Economies of Scale

When you forget your wife's / girlfriends birthday you can say that you were merely seeking to maximise economies of scale and productive efficiency, because you are waiting to get her a really big present at Christmas. This always goes down very well.(In the incredibly unlikely event it doesn't, don't forget to also check out: www.nofriendsandsingleconomist.com)

9. However - On the Other Hand

Economics is the only subject where contradicting yourself is seen as a highly desirable attribute. To double the mark on your economics essays, just say after each paragraph: however, on the other hand this is probably not true at all...

10. You will Know Why you are Unemployed

When you are standing in the unemployment queue, you will be able to tell everyone the type of unemployment they are suffering from. This will greatly endear you to the ranks of the unemployed; who will definitely not, sarcastically, ask you;Economics in Action« What Cavemen Can Teach Us About Property RightsDouble dip recession: time to panic? »The benefits of studying economics

Why Study Economics? is a website that encourages students from all educational backgrounds to study economics as their first degree. It also provides information to teachers and parents.

Where can students study economics? Over 95 departments across the UK offer an Economics degree. Some of these are straight (‘single’) Economics degrees. Normally they are simply called Economics, but sometimes they are more specialist, e.g. Agricultural Economics or Business Economics. Other degrees combine Economics with another subject (‘joint degrees’). The titles of these joint degrees includes: Economics and Management; Economics and Finance; Economics and Philosophy; Economics and Accounting; Economics and Business; Economics and History; and Economics and Politics.

What will economics students do at university? Most economics students will experience a generic first year at university which builds a solid foundation. The most important modules for a first-year economics student are Introductory Microeconomics, Introductory Macroeconomics and Quantitative Methods for Economics (statistics/mathematics). The concepts taught in these three modules will be used throughout an economics undergraduate degree. In their second, and particularly third, year at university, economics students will have a number of optional units. Students will be able to specialise in Development Economics, Managerial Economics, Labour Economics, Monetary Economics and so on. If students are on a joint degree they will have modules in their other subject in all three years, some of

which will be compulsory. Students on either single or joint economics degrees may also be able to do an optional module in another subject area such as a modern language.

“Until studying a course like economics not a lot of people are aware of how the world works, including industries, businesses and governments. You realise that it’s very important to be educated in this type of thing even if it gets to the stage where you become annoyed with family and friends for moaning about taxes!”

The workload at university is generally heavier than at A-level. Students can expect around 10 – 15 hours of contact time a week, consisting of a mixture of lectures and tutorials/seminars/workshops. In addition to this, students will be expected to put in a minimum of 20 hours per week of independent study. The number of contact hours will normally fall between years one, two and three but the amount of independent study will rise (at least it should do!).

Why do students enjoy economics? Economics is the perfect combination of numbers and words, problems and essays, calculations and interpretations. It is both an art and a science subject. Students have the opportunity to build models which give insights into the real world, and then to critique these models on the basis of their assumptions. There is rarely a right answer in economics but any argument put forward must be backed up by quantitative evidence. Students ultimately enjoy economics because it allows them to employ and develop analytical and evaluative skills.

“My decision to pursue an Economics degree has been the single most valuable investment I have made to date. It sharpened my ability to critically assess information, deliver disciplined and well structured arguments and become a more confident team player.”

What do students need to have studied to read economics at university?

Some universities have A-level Maths as a prerequisite for their economics degrees. Even if it is not required, A-level Maths is still very useful for university level economics, especially those degrees with a heavy number of quantitative modules. Those institutions that do not require A-level Maths still require a good GCSE in Maths. Furthermore, some universities may look more favourably on candidates with other quantitative subjects, such as Physics or Accounting. No university requires students to have studied A-level Economics, but it helps if they have. Aside from the subjects studied, students should only choose to read economics at university: if they enjoy keeping up with current affairs; if they are comfortable working with numbers; and if they are willing to write a number of essays.

But how can a student, who has never studied economics before, prepare for their degree? One way is through work experience, especially when this involves handling money or making any form of economic choice. Reading economic articles in newspapers and/or subscribing to The Economist will give students an edge over their peers when it comes to writing their first essay. Students could also read a couple of the books on their course’s reading list, particularly those that give lots of background information (e.g. “Fool’s Gold” by Gillian Tett). Alternatively, a lot of the popular economics literature, such as the Undercover Economist or Freakonomics, will show students that economics can be used to explain virtually any phenomena.

“Economics places a key role in all aspects of life and is an important subject worth knowing more about.”

To get an idea of the level of maths involved in their economic modules, students should have a flick through a first year textbook and have a go at some of the problems set. Finally, students should brush up on their statistics either by going back to their notes or, if they did not study maths, by working through some problems in an A-level statistics textbook. Statistics is vital for students to understand econometrics, a technique used by many authors in a number of economic journals.

And what can students do after an Economics degree? Economics graduates are well equipped, having analytical and problem-solving skills, numerical and computer skills, as well as the ability to work well either alone or within a team. All of these skills are very transferable allowing economics graduates to branch into anything from investment banking and financial services, business and public-sector management and research, to working with charities, teaching or the media. There is little restriction on what students can do afterwards.

“By the end of the degree you emerge as a student who can read as well as a law graduate, compute as well as an accountant, and analyse data as well as a statistician.”

And of course there is money. Economics graduates typically earn £4000 more than the average graduate in their first position.Eight Reasons to Study an Economics Degree

For those considering a degree in this area but need further convincing, the Complete University Guide lends its expertise. Here are eight compelling reasons to study an Economics degree:

1. Excellent graduate prospects

Take a look at our Economics subject league table, read down the graduate prospects column and you’ll see that economics students stand a fair shot of gaining professional employment within six months of graduating. The top ten universities for Economics all enjoy a score of over 80%.

2. Good graduate premium/graduate salary advantage

Out of the Complete University Guide’s 67 subjects, Economics places at an extraordinary eighth in our rankings for professional premium. This means economics graduates in professional jobs earn on average £8,803 more than those in a non-professional job.

3. Economics and the world

Economics is truly all around us, present in almost every aspect of our lives. Studying the subject gives students a generalist understanding of the world we live in and its inner workings. Students learn everything from what determines the price of goods and services to why the average standards of living vary so widely within and between countries.

4. Combined courses

What with economics pervading every element of our lives it follows that the subject complements others so well. Many universities offer dual honours degrees so students can combine their economics

degree with another passion or interest. Here’s a list of Economics and Law courses at UK providers to give you an idea.

5. Variety of modules

Economics has an impact on all walks of life and true to form universities offer a large variety of modules to reflect this. You could be studying anything from public policy to environmental economics.

6. Internationally diverse cohort

The quality of economics education at UK universities attracts a substantial number of students from overseas. In fact it’s our business and administrative degrees which benefit from the largest number of international students. The figure is more than double than that of engineering & technology, the next highest subject group.

7. Real-life application

The case-based learning emphasis on economics degrees makes it really easy to see how the theory has real-life applications, particularly when considering the recent volatility of global markets. Many universities also offer their the opportunity to apply learning in the working world whilst studying, with a year in industry. Here’s a list of Economics sandwich courses for your perusal.

8. Independence

Economics students devote a lot of their learning time to independent study. This equips them for life in the real-world, where people are expected to take responsibility for their own development and conversely, contribution.

Welcome to HES

Since its formal establishment in 1974, the History of Economics Society has committed itself to encouraging interest, fostering scholarship, and promoting discussion among scholars and professionals in the field of the history of economics. The society is an international organization that publishes the Journal of the History of Economic Thought in conjunction with Cambridge University Press, sponsors an online collection of working papers under the name of the SSRN History of Economics eJournal, supports with other societies the SHOE email list hosted by York University, provides grants as part of the Samuels Young Scholars Program, and is a contributing partner to new initiatives.

History of Economics eJournal in Association with the SSRN Economics Research Network

SSRN History of Economics eJournal promotes communication among scholars interested in all aspects of the history of economic thought. Work related to all periods and to any schools of economic thought are welcome, as is work that situates economics in wider intellectual and cultural contexts or relates it to other disciplines. Work related to the history of closely cognate disciplines (e.g., statistics with economic applications or economic sociology) is also accepted. Essentially, any work that touches the history of economics as a discipline or that would be of interest to scholars working in such an area is encouraged. Kevin D. Hoover and Steven G. Medema are SSRN History of Economics eJournal editors.

The Importance of Economics Tejvan Pettinger November 8, 2007 economicsReaders Question: What are the importance of economics?Firstly, here is a rather, frivolous look at 10 reasons to study economics

On a more serious note. The importance of economics includes the following:

Dealing with a shortage of Raw Materials. Economics provides a mechanism for looking at possible consequences as we run short of raw materials such as gas and oil.How to distribute resources in society. To what extent should we redistribute income in society? Is inequality necessary to create economic incentives or does inequality create more economic problems.The Principle of Opportunity Cost. Politicians win elections by promising more spending and cutting taxes. This is because lower taxes and more spending is what voters want to hear. However, an economist will be aware that everything has an opportunity cost. Spend more on subsidising free university education, and it means higher taxes and lower spending elsewhere. Giving students £4,000 a year to spend at university may be a noble ideal. But, is it the best use of public money? Are there not better uses of money?Social efficiency. The free market leads to countless examples of market failure. I feel one of the best uses of economics is to provide solutions to overcoming market failure. For example, driving into the centre of town creates negative externalities such as pollution and congestion. There is overconsumption. An economist can suggest a tax on driving into towns to internalise the externality. Of course new taxes are not popular, but, it would provide a better solution for society. You may not want to pay £10 a week to drive into a city centre. But, if it saved you 2 hours of sitting in a jam, then maybe you would be quite happy to pay it.Knowledge When You are Unemployed and waiting in the queue for unemployment benefits, as an economist you will know WHY you are unemployed, which is of course a great comfort.

The Importance of EconomicsReaders Question: What is the Importance of Economics?

I would suggest the main importance of economics is helping society decide on the optimal allocation of our limited resources. The fundamental problem of economic is said to be scarcity - the idea that wants (demand) is greater than the resources we have. Frequently we face choices on:What to produceHow to produceFor whom to ProduceEconomics helps to decide on questions like this. More specifically economics is important in these areas.

How to manage the macro economy.

Economists can advise governments how to manage the economy and avoid problems such as inflation and unemployment. Both inflation and mass unemployment can be devastating for society. Economists argue that both can be avoided through careful economic policies. For example:Policies to reduce unemploymentPolicies to reduce inflation

If economics can help reduce unemployment, then it can make a big improvement to economic welfare. For example, the mass unemployment of the 1930s great depression, led to much political instability and the rise of extremist political parties across Europe.

However, the problem is that economists may often disagree on the best solution to these problems. For example, at the start of the great depression in 1930, leading economists in the UK Treasury suggested that the UK needed to balance the budget; i.e. higher taxes, lower unemployment benefits. But, this made the recession deeper and led to a fall in demand.

It was in the great depression that John Maynard Keynes developed his general theory of Employment, Income and Money. He argued that classical economics had the wrong approach for dealing with depressions. Keynes argued that the economy needed expansionary fiscal policy. - higher borrowing and government spending.

Four Basic Economic QuestionsCommand Market Traditional1. What to produce?

2. How to produce it?

3. How much to produce?

4. Who gets what is produced?

Economic Definition of the Four Factors of Productionby Osmond Vitez, Demand MediaEconomic resources are the goods or services available to individuals and businesses used to produce valuable consumer products. The classic economic resources include land, labor and capital. Entrepreneurship is also considered an economic resource because individuals are responsible for creating businesses and moving economic resources in the business environment. These economic resources are also called the factors of production. The factors of production describe the function that each resource performs in the business environment.

Ads by GoogleBall MillsPrice Of Ball Mills Nice Service & Price, Get Now!www.sinoftm.com/LandLand is the economic resource encompassing natural resources found within a nation’s economy. This resource includes timber, land, fisheries, farms and other similar natural resources. Land is usually a limited resource for many economies. Although some natural resources, such as timber, food and animals, are renewable, the physical land is usually a fixed resource. Nations must carefully use their land resource by creating a mix of natural and industrial uses. Using land for industrial purposes allows nations to improve the production processes for turning natural resources into consumer goods.

LaborLabor represents the human capital available to transform raw or national resources into consumer goods. Human capital includes all able-bodied individuals capable of working in the nation’s

economy and providing various services to other individuals or businesses. This factor of production is a flexible resource as workers can be allocated to different areas of the economy for producing consumer goods or services. Human capital can also be improved through training or educating workers to complete technical functions or business tasks when working with other economic resources.

Related Reading: Factors That Affect Economic Development

CapitalCapital has two economic definitions as a factor of production. Capital can represent the monetary resources companies use to purchase natural resources, land and other capital goods. Monetary resources flow through a nation’s economy as individuals buy and sell resources to individuals and businesses.Capital also represents the major physical assets individuals and companies use when producing goods or services. These assets include buildings, production facilities, equipment, vehicles and other similar items. Individuals may create their own capital production resources, purchase them from another individual or business or lease them for a specific amount of time from individuals or other businesses.

EntrepreneurshipEntrepreneurship is considered a factor of production because economic resources can exist in an economy and not be transformed into consumer goods. Entrepreneurs usually have an idea for creating a valuable good or service and assume the risk involved with transforming economic resources into consumer products. Entrepreneurship is also considered a factor of production since someone must complete the managerial functions of gathering, allocating and distributing economic resources or consumer products to individuals and other businesses in the economy.

4 Factors of Production Economicsby Angie Mohr, Demand Media GoogleThe resources needed to produce products and services are called factors of production.The resources needed to produce products and services are called factors of production.

Related ArticlesDo Firms Own the Factors of Production?Factors of Production in a Retail Clothing StoreWhat Are the Factors of Production for the iPod Touch?How to Start a Clothing Business at HomeEconomic Definition of the Four Factors of ProductionEconomic Factors of Production

The economic theory of factors of production encompasses all of the resources and inputs that go into the manufacturing of products. Apart from direct inputs such as materials and labor, factors of production include the skills, human resources, and equipment that are required to create a product.

For small businesses, understanding these inputs is critical to the bottom line of the company as small incremental changes in cost structures can be the difference between profit and loss.

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Mill BallsMill Balls Reliable Efficient Trustworthywww.sinoftm.com/Production CapitalBesides the supplies and materials that go into the manufacturing process, other "hard" assets are needed, such as equipment, buildings and trucks. These assets are known as production capital. Production capital varies depending on the type of business. In a manufacturing setting, it includes the machinery used to build the products, the forklifts needed to warehouse and move them, and the building that houses the operation. In a service business, it could include computers, desks and telephone equipment.

Human CapitalNo business is completely automated; humans are involved in producing any business' product or service. Labor is often one of the largest expenses of a business and managing human capital appropriately and efficiently is one of the hallmarks of a successful business. Human capital can also impact a business in a less direct, but just as important, way. Customers and clients see the employees in a business as a reflection of that company. The way that the human resources of a company interact with the customer base has a large impact on customer longevity and loyalty.

Related Reading: What Factors Impact the Elasticity of Demand for Products?

Resource CapitalThe building and equipment required to run a business need to be located somewhere. Resource capital encompasses the physical space a company occupies, as well as other non-man-made resources such as water and air. Manufacturing operations often use more resource capital than service businesses because the manufacturing process requires more space for production, warehousing and showcasing.

Intellectual CapitalA business is far more than the sum of its physical parts. It takes entrepreneurial spirit, experience, creativity and know-how to make a business successful. These components are collectively called intellectual capital. Also included are rights, patents and trademarks; everything that you can't touch or see but is often the reason a business grows and succeeds. Sometimes, these "assets" of a business are not captured on a traditional financial statement as their value is indeterminable. It is almost impossible for competitors to duplicate intellectual capital, making it one of the most coveted and useful assets a business can own.

Getting the Most Out of Life: The Concept of Opportunity CostRussell Roberts*PRINTEMAILCITECOPYRIGHT Share SHAREHome | Articles | Featured Article "To get the most out of life, to think like an economist, you have to be know what you're giving up in order to get something else."

One of the challenges of being an economist is explaining what you do for a living. People understand that one of the things a professor of economics does is teach economics. But what is that, exactly? Most presume it has something to do with investing and financial management. When I once told my seatmate on an airline flight that I was an economist, she said, what a shame, my husband loves the stock market. Hmm. I didn't tell her that other than the advantages of investing in indexed mutual funds, I know next to nothing about the stock market.My seatmate might have profited from reading Alfred Marshall who called economics "the study of mankind in the ordinary business of life." This was the enterprise of Marshall and Adam Smith and Friedrich Hayek and Milton Friedman: they tried to understand what people do and the implications of their behavior for the society at large.

But my favorite definition of economics is a variant of Marshall's. It comes from a student who heard it from another teacher of hers: economics is the study of how to get the most out of life. I like this because it strikes at the true heart of economics—the choices we make, given that we can't have everything we want. Economics is the study of infinite wants and finite means, the study of constrained choices. This is true for individuals and governments, families and nations. Thomas Sowell said it best: no solutions, only tradeoffs. To get the most out of life, to think like an economist, you have to be know what you're giving up in order to get something else. That's all opportunity cost is:

Opportunity cost is what you have to give up to get something.

What could be more straightforward? If you want something you have to give up something. The idea turns out to be a little subtler than it appears at first glance. Let's look a little more closely.

Milton Friedman used to say that economics is simple. All you have to remember is that demand slopes downward and that nothing's free. The hard part is applying those two simple ideas. When Friedman said that nothing was free, he meant that everything has a cost. Take the proverbial free lunch that Friedman delighted in pointing out didn't exist. Suppose I invite you to lunch and it's on me—I promise to pay and I keep that promise. Free, right? No, says the economist.

Economist: There's no monetary cost. Today. But there's an expectation that you'll return the favor and treat me to a future lunch.

You (believer in the free lunch): But you don't realize I'm not a nice person. I don't plan on reciprocating and I'm going to keep that promise to myself. Today's lunch is free.

Economist: No. Even if you don't plan to reciprocate, the guilt at being a moocher is a cost.

You: You don't realize just how not-nice I am. I have no conscience. So I do get a free lunch.

Economist: Alas, no. You have to listen to me talk while we're eating.

You: I won't be listening. I'm going to daydream about an upcoming vacation. I'm going to pretend to be pay attention.

Economist: Still not free. The cost of having lunch with me, even when I pay, even when you don't plan on reciprocating and even when I do all the talking that you ignore, is the pleasure you would have received doing something else instead. Whatever you gave up to have lunch with me. Not just

the money. Not just the time. But the value or pleasure you would have received from doing something else.

So one of the keys to thinking like an economist is always remembering that everything has a cost. This may be one reason economists have fewer friends than they otherwise would. Sometimes people are very happy holding on to the naïve view that something is free. We like the idea of a bargain. We don't want to hear about the hidden or non-obvious costs. Thinking about foregone opportunities, the choices we didn't make, can lead to regret. Choosing this college means you can't go to that one. Marrying this person means not marrying that one. Choosing this desert (usually) means missing out on that one. Sometimes, people just want to eat their cake and have it, too, without being reminded that they missed out on a spectacular piece of pie.

Many people think that this constant harping on opportunity costs and alternatives and tradeoffs is why economics is called the dismal science. Frequent visitors to the Library of Economics and Liberty know better. See The Secret History of the Dismal Science by David M. Levy and Sandra J. Peart

All true. But if you want to get the most out of life, you have to take account of the opportunity cost, the foregone alternatives. Better to make good choices and learn how to live with them than make bad choices in blissful ignorance that lead to ruin. Here are some applications of how understanding opportunity costs helps you get the most out of life.

The real cost of college

What's the cost of college? The obvious part of the cost of college is tuition. It's not room and board because those would be incurred anyway. But the opportunity cost includes the foregone wages from the jobs you could have had if you hadn't gone to college. This is one of the reasons we go to college when we're young without any experience in the workplace—our wages are relatively low so the foregone earnings from going to college are lower.

The return on your investments

Economists do know something about the stock market. If you tell me you have a great investment track record, I want to know: compared to what. A mutual fund manager who earned 12% last year for his investors seems to have had a banner year. But mutual funds indexed to the S&P 500 earned over 15%. If both funds had a similar level of risk, that mutual fund manager had a negative return of 3%. Similarly, holding your assets in the form of cash means foregoing the opportunity to invest them. The opportunity cost of cash is the return you could earn by investing it.

Home ownership and home improvements

Real estate agents like to tell you that a house is a great investment. Your house is appreciating and you get to live in it. Sometimes both are true statements. But appreciation of the house isn't enough to make it a good investment (or a reason to buy a particularly large house on the argument that if the investment is going to appreciate, it's better to have a bigger stake). Home owners like to savor how much they sold their house for above what they paid for it. When measuring the return, they rarely subtract the direct monetary costs—the repairs, the taxes, and the fees and commissions of lawyers, real estate agents and government agencies. But I've never known the proud Boston or Washington

or L.A. house seller who calculates the foregone investment opportunities from tying up the down payment and the mortgage payments over the life of the time in the house.

Similarly, real estate agents (and contractors) like to tell you that re-doing your kitchen is a good idea because you'll get the money back in the form of a higher price when you sell your house. So the kitchen is free! And in the meanwhile, you get to enjoy the pleasures of the kitchen. That logic is fine as long as you get enough pleasure from the kitchen to offset the opportunity cost of tying your money up in cabinetry and granite and giving up the return you could have earned doing something else with the money.

One aspect of home ownership and opportunity cost is particularly tricky. Suppose your house appreciates. You could sell it and move to a smaller house or a house in a different neighborhood. But you decide to stay. The appreciation of your house means it has gotten more costly to live in it. But that increase in cost, being an opportunity cost rather than an out-of-pocket cost does not mean you are worse off. In fact, it is a sign that you are better off—an asset you own has appreciated and your wealth is higher at least as long as the appreciation stays in place. Opportunity cost is different from what we think of colloquially as cost, which usually means a monetary payment. Opportunity cost guides rational decision-making. But an increase in costs doesn't necessarily mean that you are worse off than you were before.

Sunk costs are sunk, historical costs are history

Opportunity cost is a forward-looking concept. If my car breaks down and I fix it, and it breaks down again, the decision to fix it a second time is independent of the first repairs costs. It is irrational to think that I have to fix it because I've put so much money into the car already—if I don't fix it, I'll lose all the money I've already invested. I've already lost the money on the first repair. Now I should only ask whether the second set of repairs are worth it.

A variation on the "sunk cost" argument is the irrelevancy of historical costs. What the seller paid for a house twenty years ago has little effect on the market price today. Complaining that the seller is charging an exorbitant price compared to what the seller paid originally, only insures you will have trouble finding someone to sell you a house that meets your standards of a fair price. On the flip side, explaining to a prospective buyer in a housing market that has collapsed, that your price is high because after all, you paid a lot for it once and it's only fair that you get your money back plus a fair return, is unlikely to be a successful strategy for selling your house. Market prices ignore history.

Replacement costs are more relevant than historical costs. If a friend gives you a Van Gogh as a wedding present and a few years later, a drunken dinner guest plunges a carving knife through it after losing his balance, your guest wouldn't tell you to shrug it off because after all, it was a gift, you didn't pay anything for it.

Self-sufficiency vs. relying on others

Perhaps the most important application of opportunity cost is the decision to do things for yourself vs. hiring someone. Doing it yourself is often cheaper and can be fun. But the cost of doing it yourself is the value of the other things you could have done with your time. Those other things might include working a part-time job or doing consulting, which means you forego money. So doing it yourself can be costly in the monetary sense. But the non-monetary costs can dwarf the monetary costs. Time

spent painting your house yourself is time you can't spend reading to your children or being with your spouse or volunteering at the local soup kitchen.

Ultimately, anything close to genuine self-sufficiency is the road to poverty. An avid do-it-yourselfer might change her own oil, bake her own bread and build a bookcase in her basement workshop. But she won't forge her own steel and the fashion her own car. She won't grow her own wheat or mill her own flour. She won't cut down a tree and plane the wood for that bookcase. And even if she did, she'll buy the saw. She won't make it for herself.

Opportunity cost is key to understanding the concept of comparative advantage. See Comparative Advantage, by Lauren F. Landsburg and Treasure Island: The Power of Trade Part I. The Seemingly Simple Story of Comparative Advantage, by Russ Roberts.

By specializing in a very small set of skills, selling those skills in the marketplace and relying on the skills of other specializing individuals we create much of what we call specialization. We specialize because the costs of self-sufficiency are so high.

Of all the constraints we face, the constraint of 24 hours in a day and a finite lifetime are ones we cannot escape. Getting the most out of life means using that precious time wisely. Using that time wisely means using and understanding opportunity cost.

Real vs. NominalSupplementary resources by topic. Real vs. Nominal is one of 51 key economics concepts identified by the National Council on Economic Education (NCEE) for high school classes.PRINTEMAILShare SHAREHome | Guides | High School Economics Topics | Real vs. NominalOn this page:Definitions and BasicsIn the News and ExamplesA Little History: Primary Sources and ReferencesAdvanced ResourcesRelated TopicsDefinitions and BasicsDefinition: The nominal value of a good is its value in terms of money. The real value is its value in terms of some other good, service, or bundle of goods.Examples:Nominal: That CD costs $18. Japan's science and technology spending is about 3 trillion yen per year.Real: A year of college costs about the value of a Toyota Camry. Those tickets to see Van Halen cost me three weeks' worth of food!Relative price is another term for the real price of a good or service. When we say that the relative price of computers has fallen in recent years, we mean that the price of computers relative to or measured in terms of other goods and services—such as TVs or cars—has declined. Relative prices of individual goods and services can decrease even if nominal prices are all increasing, because of inflation.

Real versus nominal value, at Answers.comIn economics, the nominal values of something are its money values in different years. Real values adjust for differences in the price level in those years. Examples include a bundle of commodities, such as Gross Domestic Product, and income. For a series of nominal values in successive years, different values could be because of differences in the price level. But nominal values do not specify how much of the difference is from changes in the price level. Real values remove this ambiguity. Real values convert the nominal values as if prices were constant in each year of the series. Any differences in real values are then attributed to differences in quantities of the bundle or differences in the amount of goods that the money incomes could buy in each year....Gross Domestic Product, from the Concise Encyclopedia of EconomicsIn practice BEA first uses the raw data on production to make estimates of nominal GDP, or GDP in current dollars. It then adjusts these data for inflation to arrive at real GDP. But BEA also uses the nominal GDP figures to produce the "income side" of GDP in double-entry bookkeeping. For every dollar of GDP there is a dollar of income. The income numbers inform us about overall trends in the income of corporations and individuals. Other agencies and private sources report bits and pieces of the income data, but the income data associated with the GDP provide a comprehensive and consistent set of income figures for the United States. These data can be used to address important and controversial issues such as the level and growth of disposable income per capita, the return on investment, and the level of saving....Interest, from the Concise Encyclopedia of EconomicsThe real interest rate on money loans will be the stated (or nominal) rate minus the anticipated rate of inflation. In countries that are experiencing rapid growth in the amount of money available, interest rates will be very high. But these will be not be high real interest rates. Instead, they will be high nominal interest rates. If expected inflation is 10 percent, for example, and if the real interest rate is 5 percent, the nominal interest rate is 15 percent. But someone who lends money at 15 percent for a year will not be repaid with 15 percent more resources at the end of the year. Rather, the lender will be repaid with 15 percent more money and will be able to use that money to buy only 5 percent more resources. ...

In the News and ExamplesTax Freedom Day 2014 is April 21, Three Days Later Than Last Year. TaxFoundation.orgTax Freedom Day is the day when the nation as a whole has earned enough money to pay its total tax bill for year. A vivid, calendar-based illustration of the cost of government, Tax Freedom Day divides all federal, state, and local taxes by the nation�s income. In 2014, Americans will pay $3.0 trillion in federal taxes and $1.5 trillion in state taxes, for a total tax bill of $4.5 trillion, or 30.2 percent of income. This year, Tax Freedom Day falls on April 21, or 111 days into the year.

A Little History: Primary Sources and ReferencesIrving Fisher, from the Concise Encyclopedia of EconomicsFisher was also the first economist to distinguish clearly between real and nominal interest rates. He pointed out that the real interest rate is equal to the nominal interest rate (the one we observe) minus the expected inflation rate. If the nominal interest rate is 12 percent, for example, but people expect inflation of 7 percent, then the real interest rate is only 5 percent. Again, this is still the basic understanding of modern economists....

1. Nominal Interest Rates vs. Real Interest Rates

Suppose we buy a 1 year bond for face value that pays 6% at the end of the year. We pay $100 at the beginning of the year and get $106 at the end of the year. Thus the bond pays an interest rate of 6%. This 6% is the nominal interest rate, as we have not accounted for inflation. Whenever people speak of the interest rate they're talking about the nominal interest rate, unless they state otherwise.Now suppose the inflation rate is 3% for that year. We can buy a basket of goods today and it will cost $100, or we can buy that basket next year and it will cost $103. If we buy the bond with a 6% nominal interest rate for $100, sell it after a year and get $106, buy a basket of goods for $103, we will have $3 left over. So after factoring in inflation, our $100 bond will earn us $3 in income; a real interest rate of 3%. The relationship between the nominal interest rate, inflation, and the real interest rate is described by the Fisher Equation:

If inflation is positive, which it generally is, then the real interest rate is lower than the nominal interest rate. If we have deflation and the inflation rate is negative, then the real interest rate will be larger.2. Nominal GDP Growth vs. Real GDP Growth

GDP, or Gross Domestic Product is the value of all the goods and services produced in a country. The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. On the other hand, Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year. An example:Suppose in the year 2000, the economy of a country produced $100 billion worth of goods and services based on year 2000 prices. Since we're using 2000 as a basis year, the nominal and real GDP are the same. In the year 2001, the economy produced $110B worth of goods and services based on year 2001 prices. Those same goods and services are instead valued at $105B if year 2000 prices are used. Then: