Opportunity Cost

Opportunity Cost is the cost of an alternative good or service that must be forgone because of a certain action. In other words Opportunity Cost of a resource is the next highest valued alternative use of that resource. For example if you chose to go out and see a movie your opportunity cost would be the time that you could have saved if you did not see that movie. Another example is the opportunity cost of going to college, if you did not go to college you would have saved money if you had worked instead. There are opportunity costs with every transaction because since goods and services are scarce something must be forgone while you are making a purchase.

Opportunity Cost plays a large part in choosing what investment to pick. If you invest in a stock that gives you a 2% return over the year. You chose to invest in that stock over another investment. If a stock you didn’t choose gave a return of 8% your opportunity cost would be 6% (8%-2%).

 

sources

http://www.investopedia.com/terms/o/opportunitycost.asp

http://www.econlib.org/library/Enc/OpportunityCost.html

Economic Bubble

What Is A Bubble?

A bubble can form in economies, securities, stock markets and business sectors because of a change in the way that people conduct their businesses. For example during the tech boom people bought tech stocks at high prices believing that they could sell those stocks at an even higher price until they lose their confidence is lost and a large market correction or crash occurs. The same can be seen in the recent housing crisis. For years the prices of homes were rising and people thought that they would continually be an investment that would increase in value, so people took out home loans and invested in houses. However when there was a large influx of houses on the market it drove the price of houses down and the market crashed causing people to default on their loans resulting in a financial crisis as well. An economic bubble can also be described as a surge in a market caused by speculation regarding a commodity which results in an increased level of activity in that market which causes over-inflated prices.

Economic Bubbles In U.S. History

The United States housing bubble is one tat still lies in the minds of countless Americans who were effected. Housing prices peaked in the U.S. in early 2006 and then started to decline in 2006/07. In 1990 the average price of a U.S. home was priced at $149,800. There were many reasons that the housing bubble burst. In 1997 the Taxpayer Relief Act offered tax relief for people on the profits that were gained from the sale of a person's residence. People started investing in second homes and investment properties to take advantage of this. The Taxpayer Relief Act of 1997 made housing the only investment which escaped capital gains (the Taxpayer Relief Act gave single individuals $250,000 exclusion of taxes on capital gains and $500,000 for married couples). The Taxpayer Relief Act encouraged people to buy expensive, fully mortgaged homes as well as invest in second properties instead of investing in stocks, bonds, or other assets.

There were many other sources of the housing bubble that burst in 2007 which I will talk about in a later article that gives a more in depth description of the housing crisis. However the result was that people instead of putting their money in savings put their money in large housing investments beyond the amount of money that they currently held. The thought was that with the prices of housing appreciating (increasing in value) they would be able to pay off the large investment easily. However as housing prices started to decline in late 2006 the return on these investments decreased. A stipulation in the loans that people were taking out to invest in these expansive houses was that the house would serve as collateral if the person were to default on their loan so the bank would win no matter what because they had confidence that the housing market would continue to improve and the house that served as collateral would appreciate in value. However as the value of housing decreased consumer confidence in the housing market was lost and many people defaulted on their loans causing many home to go on the market thus decreasing the prices of houses further.

Sources

http://www.businessdictionary.com/definition/economic-bubble.html

Recessions

picture taken from (http://poetsandquants.com/wp-content/uploads/2013/02/recession.jpg)
In our current place in time the term recession is very important because that is what the United States has been going through for years. The term recession in economics is a general slowing down of economic activity. Indicators like GDP, employment, and investment spending fall while unemployment rises. There are many factors that can lead to a recession but the major cause of a recession is inflation. While there is high inflation and the percentage of goods and services that you can buy with the same amount of money decreases people cut the amount that they spend leisurely.This reduces overall spending as people begin to save more as inflation increases, however as individuals and businesses need to reduce their spending to avoid the higher costs GDP (gross domestic production) will decline. Unemployment will increase due to companies trying to lower their costs. The fall of GDP and the rise and unemployment are factors that cause an economy to go into a recession. 

What is Inflation?

What Is Inflation?
Inflation is described as the rate at which the general level of prices for goods and services is rising and the purchasing power of your currency is falling or in other words the increased cost of living. As inflation rises every dollar will buy a smaller percentage of a good. For example if inflation rises at 2% per year an item that is worth $1 will cost $1.02 in a year. The rate that inflation increases and decreases is watched very closely by central banks all over the world.
The cause of inflation depends on many different variables. For example if there is an increase in the money supply it can cause inflation. This is shown in the aggregate supply and aggregate demand model that measures the price level in relation to income. If the price of oil increases it can cause inflation in the economy. There are many different factors that can cause an increase or decrease in inflation. The countries central bank is charged with the task of managing inflation in the economy. The central bank can attempt to control the inflation by performing open market operations.
Is inflation bad? The common perception is that inflation is always negative. However this is not true. Inflation  is only negative if it is unanticipated because it causes a mis-allocation of resources. If the rate of inflation is known workers will be able to adjust their wages in order to counteract the increase in the price level. If the inflation rate is supposed to be at 2% workers will ask for a 2% raise in their wages to counter the rise in inflation. But if there is unanticipated inflation in the economy if workers are asking for a 2% increase in wages more money will be put into their employers salaries thus causing a mis-allocation of resources.
Deflation
Deflation is the opposite of inflation. when prices fall in an economy you have deflation. Deflation in considered negative if people see an item dropping in price they tend to wait for it to drop further instead of buying it right away. However deflation is not always a negative phenomenon. If falling prices are a result of increased productivity it can reflect strong growth in an economy.


Sources
http://www.investopedia.com/terms/i/inflation.asp
http://www.cbc.ca/news/story/2009/07/17/f-economy-inflation-deflation.html

Scarcity

What Is Scarcity?
Scarcity is the economic concept of there being finite resources in the world. The study of economics is the study of resources that are scarce. If scarcity was not a problem and the world was filled with a limitless supply of everything people would not be forced to make trade-offs of their needs and wants. You make choices between different items because the resources that are necessary are limited. Scarcity is a basic economic concept that lies at the core of economics.



Economic Goods vs. Free Goods

Any good or service that is scarce is called an economic good, other goods that are not scarce are called free goods. Free goods are in such a large abundance that they are not considered scarce. An example of a scarce good is air, air is in such a great abundance in our world that we do not have to worry about it's scarcity and make a trade-off based on the amount of air that you require.




(picture from http://www.hiphoppress.com/images/graf/scarcity.jpg)


What Kinds of Good's Are Scarce?
Physical goods are most likely to remain scarce, an example of a physical good is iron. There is fixed amount of iron in the world. Some non-physical goods are designed to be scarce as well. Positional goods are an example of a non-physical good that is scarce. Examples of positional goods are certain awards, fame, and membership of groups that are considered "elite". These positional goods get all of their meaning from society and are considered scarce because of their value.

The Importance Of Scarcity
Economics is a social science that looks at how individuals, governments, and firms make choices on allocating scarce resources in order to satisfy their desires. Scarcity lies at the very heart of economics, if all goods and services were in a great abundance and not considered scarce their would be no economy because people would not have to make trade-offs when deciding between two different items.


Sources
http://www.investopedia.com/terms/s/scarcity.asp
http://www.econlib.org/library/Topics/HighSchool/Scarcity.html
http://www.investopedia.com/terms/e/economics.asp