Introduction to Economics - Essay Example

Ricardos Theory The Problem: As a manager of a financial planning business you have two financial planners, Phil and Francis. In an hour, Phil can produce either one financial statement or answer 8 phone calls, while Francis can either produce 2 financial statements or answer 10 phone calls. Does either person have an absolute advantage in producing both products? Should these two planners be self-sufficient (each producing statements and answering phones) or specialize?The Dilemma: The problem appears to indicate that Francis does both Financial Statements and Answers the Phone more efficiently.

Francis enjoys an absolute advantage. Why would there be an advantage to turning either task over to Phil and specializing? The answer comes from the Ricardo Theory that was put forth by the 19th century economist David Ricardo (The history of economic thought n.d.). The theory addresses the problem of comparative advantage.The Solution: Phone Calls Financial Statements Francis 10 2 Phil 8 1To solve the dilemma, we first need to calculate the opportunity costsFor Francis, 10 calls = 2 statements :: 1 call = .

2 statements :: 1 statement = 5 calls Phil 8 calls = 1 statement :: 1 call = .125 statements :: 1 statement = 8 callsAs can be seen from the table the cost of a phone call for Phil (.125 statements) is less than the cost of a call for Francis (.2 statements). However, the cost of a statement for Phil is 8 calls, but for Francis it is only 5 calls. Francis can produce a statement for fewer resources than Phil, and Phil can produce a call for less than Francis. They should therefore specialize.

Phil should answer the phone and Francis should do the financial statements. Housing: Supply and DemandAbstractThis study was undertaken to analyze the effect that demand has on the US real estate market. The project studied the housing costs in 6 major cities. It was theorized that three factors; Demand, Area Income, and Value would affect housing. By evaluating the median housing price, the median incomes, and the housing available at the median price we were able to show the influence of demand.

It was found that area income had no effect on housing cost. Likewise, we found that the higher cost areas provided less housing than the lower cost areas. The study concluded that the market was almost exclusively demand driven.The StudyThe 6 major cities that are listed on the graph in Figure 1 display their median housing cost. It ranged from a high in San Francisco CA of $726,700 to a low in Austin TX of $170,900. The other 4 cities, New York, Boston, Seattle, and Chicago fell in the middle.

If there were an increase in cost is due to higher local area wages, it would be expected that all cities would spend about the same percentage of their wages for housing. However, the graph, indicated by Relative % of income, shows that people in San Francisco spend a proportion of their income based on the housing costs. This was true across the study. As housing costs fell, the Figure 1 ( Data from American Fact Finder) percentage of annual income spent on housing fell also. Housing was not priced according to income.

The percentage of income spent rose to meet the housing cost. The study also examined the value of the housing attained for median price. If value were a factor, housing in San Francisco would be expected to have more bedrooms, bathrooms, and square footage. In fact, the opposite was true. A median priced single family home in San Francisco had 1-3 bedrooms, 1-2 baths, and 1000-1500 square feet. The lower cost housing in Austin typically had 3-4 bedrooms, 2-3 baths, and 1500-2000 square feet.

This indicates that as demand goes up, not only do prices rise but the value also goes down.The study has shown that area wages do not affect housing prices. Value has been shown to be inversely proportional to median price when comparing different locations. The market is demand driven. It is similar to an auction with many bidders for very few items. The items will be sold to the few people who are willing to pay the most. In a low demand market, such as Austin TX, there are few bidders for many homes.

Sellers are willing to sell for what they can afford to take. It should also be noted that the study showed there were far more houses available in Austin in the median price range than there were in San Francisco. This is in spite of the fact that Austin has a lower population and less population density that San Francisco. Opportunity CostsWhen we make choices in business, we elect to place our resources in to one venture at the exclusion of another. If a factory decides to make dishwashers instead of refrigerators, their opportunity cost is the profit of the refrigerators.

This must be a part of a cost/benefit analysis (Ferguson 2002 p.8). If a person decides to buy a sofa, they may pass up the opportunity to buy a stereo. The missed opportunity is the opportunity cost.Of course, everyone is always looking for the best opportunity to take advantage of. In business, the firm is always looking for the best use of their resources. Determining if the business is making the right decision requires it to examine the benefits of the alternatives that it is passing up.

It is the same in a persons personal life. When we make decisions about where to live, where to work, or what to pursue, we are making a decision with an associated opportunity cost. I recently made the decision to go to college and get a degree. I passed up other opportunities to do this. I could have continued to work full time and attempt to advance my career without a degree. In the short run, I would have had more regular income. I passed up the regular hours and the opportunity for overtime and bonuses for an education.

The opportunity cost can be put in terms of dollars. The opportunity cost was approximately $100,000.Just as in business, I consider the $100K an investment. Over the life span of the education, I expect it to pay back several times over. When making any decision, we need to evaluate what we are giving up in the way of opportunity costs and consider that as part of the equation.ReferencesAmerican Fact Finder (2005). Retrieved February 12, 2007, from http://factfinder.census.gov/home/saff/main.html?_lang=enFerguson, K. (2002). Essential economics: A guide for business students.

Hampshire, NY: Palgrave Macmillan.The history of economic thought (n.d.). Retrieved February 12, 2007, from http://cepa.newschool.edu/het/home.htm