Opportunity Cost Metaphor: In using the opportunity cost model we assume there are only two good you can produce, such a Apple juice and lemonade. We know that the more we produce of Apple Juice the less we can make & sell of lemonade and vice-versa. If you make allot of lemonade and a little apple juice THEN you have chosen an uncommon opportunity cost solution compared to what kid normally do (i.e. just sell lemonade). Also, you have to assume you have a limited amount of resources to start & run your lemonade/apple juice stand (i.e. limited money supply so you seek maximum satisfaction for yourself using your money to produce the most of lemonade and apple juice).

Using the lemonade stand example in a personal way: If people prefer Apple juice and you provide lemonade then the amount of money you could have made in excess of what you make now with your lemonade stand is your opportunity cost. If lemonade is cheaper to make and sell  BUT you sell apple juice then the amount of lemonade you COULD have produced & extra money you COULD have made if you had a lemonade stand is your opportunity cost.

 
Definition of Opportunity Cost from Invetopedia:

What Does Opportunity Cost Mean?
1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

2. The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).


In economics, opportunity cost refers to what you can produce at the cost of another. 

For example; you could allocate more of the budget to weapons or more to a social safety net such as medicare. In choosing one over the other you face a 'tade-off'. An economy with all resources used up for war or all resources used up for social services only exist in extremely unbalanced economies and political systems and even then don't exist in its pure forms.

In economics you seek to balance one choice against another to find a balance that is right for that particular society. Going to extremes is not something economists are supposed to do . Reducing taxes to a degree can stimulate the economy and even create jobs. After a certain point it ceases to be useful and that point will change for each time and situation (economics is about understanding the currant situation and formulating a solution). 

If tax cuts already haven't worked so increasing them will also not work. In other words, decreasing taxes can be useful to a point and beyond that point they are detrimental to society. No taxes (revenue for a central authority) in a society would mean no public goods, i.e. parks, no streets, no street lights, no libraries, no medicare, no social security, no military (since no society can exist without taxes this scenario is refereed to as 'hypothetical' by economists). In the same way, raising taxes to 100% or 90% or even 75% would be too much and it would be bad for the economy. 

In social applications of economics going to an extreme in either direction is generally NOT done. Politics does take extreme views, however, it is important to keep in  mind that some political policies often have nothing to do with economics and are therefore extremely bad for an economy no matter how they are framed as the 'solution to everything'.

Balancing the public good with private enterprise (so that there is opportunity for upward mobility for ALL citizens) is one reason why economies exist as 'mixed economies'. i.e. government and the private sector is melded together to provide social and economic growth. This will hold true unless subverted by a few (such as an aristocracy) for personal gain.

Definition of mixed economy:
An economic system in which both the private enterprise and a degree of state monopoly (usually in public services, defense, infrastructure, and basic industries) coexist. All modern economies are mixed where the means of production are shared between the private and public sectors. Also called dual economy.

Engineering Level Conversation in Matrix Reloaded (alternate viewing on youtube):

Background:Case Study: Sweden's "Evil" Socialism & It's Broken Economy 2
GOP Forgot The Individual Mandate & ObamaCare Are Designed By Heritage Institute
Lesson 5: Efficiency & Inefficiency In Business, Economics & The Economy

Listen to this carefully: The Affordable Care Act or "ObamaCare" was designed by everyone EXCEPT Obama. It involves PAYING so it can't be "socialism" by ANY definition of the word (socialism is when ALL production - or in this case HEALTHCARE - is provided by the State... THIS HEALTHCARE PROGRAM IS PROVIDED BY CORPORATIONS NOT THE STATE!). Medicare is kinda more along the lines of socialism but without all production being handled by the State... so even Medicare doesn't qualify as the "socialism" being promoted by Faux News (NOT social security as it's paid for by a payroll tax, i.e. you pay for your social security by working to live which can last forever if not for special interests). The healthcare program would be fine except for the over-price drugs and other inefficiencies that exist within the system. Switzerland also has a single-payer system and much less inefficiency so they have a much lower cost. If we reduce the inefficiencies - such as the excessive profits the pharmaceuticals make on over-priced drugs - then even the tiny subsidy the Federal Government is giving to individuals CAN be removed. In other words, THIS IS A PAID GOVERNMENT PROGRAM THAT DOESN'T QUALIFY AS CHARITY OR SOCIALISM IN ANY WAY BY ANY STRETCH OF THE IMAGINATION.

Obamacare, brought to you by Johnson & Johnson: When push comes to shove, corporate interests will always have the upper hand in determining public policy  (i.e. it was made by a corporation - CRONY CAPITALISM! Remove the inefficiencies and no subsidy may be needed)
     
Obamacare architect heads to Big Pharma: Liz Fowler again exemplifies the blurred lines between the healthcare industry and Washington           

Big Pharma Allies: Cigna, Aetna, Blue Cross -- they're allies, not competitors, when it comes to stopping a public plan                   
Lobbyists: Their influence on Washington dates back to the days of Lincoln -- and it only seems to be growing

USA has a market based healthcare approach (good) made by crony capitalists (bad)

i.e. The problem here is powerful, privately owned enterprises, who influence the nations wealth by having connections into the Government 

When you make plans you have to balance income with expenditure while making sure your plans for growth exclude inefficiencies that would make your economic policy ineffective on a small or large level depending on the size of the inefficiency. 

Using The Lemonade Stand Example: If you get a pound of lemons and you squeeze each lemon improperly so that all of the lemon juice isn't squeezed out of the lemon piece then you are not using your ingredients (the lemons) a well a you could. That means you will need to buy more lemons to make that amount of lemonade you could have made if you squeezed the lemon juice out of the lemon properly. If you only squeeze the lemon hard enough to get half of the lemon juice out then you inefficiency of production (i.e. ineptitude if using you ingredients in making ou lemonade) will be much more. The lemonade stand that uses it's lemon and sugar and water MOST efficiently - with the bests taste - will make the most amount of profit.


Dictionary Definition of Efficiency;

1: the quality or degree of being efficient
2a : efficient operation b (1) : effective operation as measured by a comparison of production with cost (as in energy, time, and money) (2) : the ratio of the useful energy delivered by a dynamic system to the energy supplied to it 

Definition from Investopedia:

What Does Efficiency Mean?

A level of performance that describes a process that uses the lowest amount of inputs to create the greatest amount of outputs. Efficiency relates to the use of all inputs in producing any given output, including personal time and energy.

Investopedia explains Efficiency

Efficiency is an important attribute because all inputs are scarce. Time, money and raw materials are limited, so it makes sense to try to conserve them while maintaining an acceptable level of output or a general production level.

Being efficient simply means reducing the amount of wasted inputs.

Read more.
When a project is efficient you minimize waste. You put in money into a project and attain specific short-term and long-term goals. In some cases, efficiency and inefficiency is difficult to estimate, however in other cases it is easy.

Here is an example of gross inefficiency from Greece (money wasted into unfulfilled projects):

In the southern suburbs of Athens, the abandoned terminal building at the city's old international airport stands as a symbol of promises unfulfilled.

Closed down a decade ago, the site includes 170 acres of prime coastal land on the shores of the Aegean sea and for some time there have been ambitious plans to sell it for redevelopment to the Gulf state of Qatar.

But so far they are just that - plans. And that makes the rest of the eurozone jumpy. 

Here is another example of gross inefficiency (money wasted by putting it into a project that was known to fail - a level of inefficiency that really is impressive... so impressive that the sentence "set-up to discount the healthier alternative energy" may be more appropriate); 

Daily Show Expose: That Custom-Tailored Obama Scandal You Ordered Is Finally Here - Solyndra's failure doesn't discredit the entire idea of a green energy economy, but some might take it as a sign of the Obama administration's incompetence.  (08:10):

Note: 4 mins and 30 seconds into the video above you discover that a report actually shows that this project would run out of money this month of this year. Clear sign of inefficiency.

The following is an extract from a news report about the same inefficiency in the video above:
Energy-related loan guarantees arose from the stimulus legislation of 2009. Policy makers thought a huge infusion of low-cost loans would create many thousands of jobs at solar- panel factories, alternative-energy power plants and the like. There was an implicit assumption that most of these ventures would succeed. Barring fraud, Solyndra’s failure reflects the company’s bet on an inadequate technology. Its tubes, coated with an unusual four-metal compound, were supposed to cut power costs more than 20 percent. That wasn’t nearly enough. Production costs fell much faster for a rival technology, conventional flat silicon panels, and Solyndra couldn’t compete.

The guys who set-up this project (possibly due to another sex bribe which the last administration was known for) were George Bush & Dick Cheney:

Exclusive Timeline: Bush Administration Advanced Solyndra Loan Guarantee for Two Years, Media Blow the Story
What critics fail to mention is that the Solyndra deal is more than three years old, started under the Bush Administration, which tried to conditionally approve the loan right before Obama took office. Rather than “pushing funds out the door too quickly,” the Obama Administration restructured the original loan when it came into office to further protect the taxpayers’ investment.

Stranger (or more revealing): What The Press Is Getting Wrong About Solyndra

An Example: Imagine every house in your neighborhood had a lemonade stand on it. Every lemonade stand is trying to sell lemonade to it's passerby's. Only a certain number of people can pass by in a day and most lemonade stands may have regular customers (parents & friends). In a pure perfect competition, profits are very small as the profit margins are very small and sales are also low. The only way all can make profit would be in some sort of lemonade festival. But even that would work only once or twice a year.

More in-depth explanation of perfect competition:

  From BasicEconomics.info

In competitive markets there are:

1. Many buyers and sellers - individual firms have little effect on the price.
2. Goods offered are very similar - demand is very elastic for individual firms.
3. Firms can freely enter or exit the industry - no substantial barriers to entry.

Competitive firms have no market power. Recall that businesses are trying to maximize profits, and Profit = Total Revenue (TR) - Total Cost (TC).

Market Failures and Externalities
Principle of Economics #7: Governments can sometimes improve market outcomes. Markets do many things well. With competition and no externalities, markets will allocate resources so as to maximize the surplus available. However, if these conditions are not met, markets may fail to achieve the optimal outcome. This is also known as "market failure".

If a big business is involved in activities that, say pollutes water, then it is harming fellow citizens and it's own consumers. This is called a 'negative externality'. This is an example of perfect competition NOT working efficiently. In such situations the government steps in a balances the situation so immoral business practices creating negative externalities can be controlled creating a better community and business atmosphere for everyone. That is why in practice (i.e. in the Real World) perfect competition with no regulation rarely exists, instead we have 'mixed economies' which is what exists in all democracies (and helps a democracy function better if the laws are set and administered appropriately)


More about Perfect Competition from Investopedia:

What Does Perfect Competition Mean?
A market structure in which the following five criteria are met:

1. All firms sell an identical product.
2. All firms are price takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices
charged by each firm.
5. The industry is characterized by freedom of entry and exit.
Investopedia explains Perfect Competition
Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared. The industry that best reflects perfect competition in real life is the agricultural industry.

The rainforests are being cut down faster and faster and since they are like the lungs of the earth, filtering air for all to breathe (though some scientists are debating this), besides the potential medical breakthroughs that the undiscovered plants and animals could bring, it is now more important that ever to find an alternative to cutting down trees to make ranches for raising cows for food, especially since the soil isn't fertile enough for crops or long-term non-forest use anyways. This image reflects the current business model being used for the rainforests:

Note: The "Capitalism" being talked about here is robber-baron type capitalism.
(i.e. robber baron capitalists take what they want and 'everyone else be damned').

Iguana Farms: Iguana tastes like chicken, are easy to farm - even with chickens and turkeys on the farm as they are plant eaters! - and they will prove to be more profitable than cows (less costs) and iguanas are easier to raise in the rainforests ... thus eliminating the need to clear land for cow ranching. Here is a video to get an idea of what an iguana farm is like: 

More:

Video 2 on Iguana farming

Video 3 on Iguana farming

Video 4 on Iguana farming

On Deforestation (extract)

In the past hundred years, humans have begun destroying rainforests at an alarming rate. Today, roughly 1.5 acres of rainforest are destroyed every second. People are cutting down the rainforests in pursuit of three major resources:

• Land for crops
• Lumber for paper and other wood products
• Land for livestock pastures

In the current economy, people obviously have a need for all of these resources. But almost all experts agree that, over time, we will suffer much more from the destruction of the rainforests than we will benefit. The world's rainforest are an extremely valuable natural resource, to be sure, but not for their lumber or their land. They are the main cradle of life on Earth, and they hold millions of unique life forms that we have yet to discover. Destroying the rainforests is comparable to destroying an unknown planet -- we have no idea what we're losing. If deforestation continues at its current rate, the world's tropical rainforests will be wiped out within 40 years.

Note: The worlds paper problem can be solved by growing non-thc based hemp which grows fast, in soil with low fertility and produces high quality paper (better than the paper from trees!). Since the hemp I am talking about can't get anyone high likes it's cousin the Marijuana plant, there is no need to consult doctors or psychiatrists to make hemp legal for growing.

The key to making money from this technique is to realize that paper money is connected to Treasury Bills and so lack of demand for Treasury Bills will increase demand for Gold (it's opposite on the commodities and bonds market). This means, if you attack an economy of a country through it's stock market... all you would have to do is lower expectations of the countries ability to succeed and they will buy gold from you of your affiliate.

Another way of saying this is that: When an economy does good the price of Gold goes down... so when the economy is doing bad, buy gold. When an economy is doing good, cash becomes relatively more valuable. If there are any people with money who know 21st Century economics then they could in theory, hold a country's economy hostage and make a huge amount of money.

4 Law Enforcement: To know who simply watch who buys and sells gold, when and why. When the patterns emerge you have proof of a crime (securities/economic fraud i.e. con game).

Markets today fluctuate at the drop of a hat. For example in the following video you see that "After Rupert Murdoch gets hit with a pie, News Corp.'s stocks spike"...

This shows that an incident that has nothing to do with business or the proceedings at hand can boost the prices in today's stock markets a great deal.

In fact, it has been shown that 'rumors can move markets'.

The Emerging Gold Bubble

Gold price hits all-time high on US debt concerns
The price of gold has risen to a fresh all-time high of $1,594.16 an ounce, and the dollar has fallen, on concerns the US may default on its debts.The moves came after ratings agency Moody's said it may cut the debt rating of the US, warning there was a "rising possibility" it will default.

Uncertainty and concerns (fears) about the future cause the markets (which are free floating) to fluctuate. Since the supply of Gold is limited it has great 'store of value' (one of the measures/definitions that economists use to define money)

As the article further explains...

Gold is seen as the number one safe haven purchase in times of economic uncertainty, but analysts said its rise was also caused by the fall in the dollar, which makes the precious metal more affordable for holders of other currencies.

Taking market variability into account and the promotions to buy gold to a large number of consumers (such as Rush Limbaugh promoting gold through this page or Glenn Beck pushing gold as the only asset that matters because a 70 year old gynocologist says so), the following analysis about a possible gold bubble makes sense...

Fareed Zakria: This is bizarre. A lot of it is simply scaremongering. The truth is that for two and half decades, between 1980 and the mid 2000s - gold prices actually declined. Unlike many other commodities which actually have an end use - oil, minerals - gold is just a symbol, and as such its price rises have to do more with psychology and emotion than reason. So, when it falls out of fashion, the price could really collapse. The next time you watch Goldfinger or you hear of the antics of a Hugo Chavez or a Donald Trump, be a little wary.

Gold isn't a stock with real earnings. It isn't a bond with interest payments. It isn't oil. It won't help you drive a car; it won't help you light a fire. Yes, you can wear it, but you can't eat it. If doomsday really arrives, a can of baked beans might be worth a lot more than a brick of gold.

Stock & Awe - Europe's financial crisis threatens to decimate the global economy, so Jon exercises his contractual doomsday clause with help from The Best F#@king News Team Ever.  (04:23): 

At approx 4 mins - Stock volatility actually helps the traders. (This has to do with the variety of maneuvers at their disposal to make money on market fluctuations - Note: This does not include any big money players up to their own plans for better or worse).

So when Senator Bernie Sanders writes;

Why have oil prices spiked wildly? Some argue that the volatility is a result of supply-and-demand fundamentals. More and more observers, however, believe that excessive speculation in the oil futures market by investors is driving oil prices sky high.

A June 2 article in the Wall Street Journal said it all: “Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks’ profits.” ExxonMobil Chairman Rex Tillerson, testifying before a Senate panel this year, said that excessive speculation may have increased oil prices by as much as 40 percent. Delta Air Lines general counsel Richard Hirst wrote to federal regulators in December that “the speculative bubble in oil prices has concrete detrimental consequences for the real economy.” An American Trucking Association vice president, Richard Moskowitz, said, “Excessive speculation has caused dramatic increases in the price of crude oil, which harms end-users like America’s trucking industry.”

This is a claim that should be taken seriously about the unreliability of some of these stock market reactions (afterall, with much of the wealth with a small number of people (i.e. income inequality), it doesn't take much to skew/play-with a market)

Adam Smith popularized the idea of the 'invisible hand' that guides market forces. The idea is that the demand of individual and groups of consumers when matched with the supply of the goods that are demanded will create a fixed price which will distribute all the goods (supply) to all the consumers who can afford it (demand). Or in other words,  the optimal price to sell your lemonade at so that you sell all of it.

Adam Smith did say that government intervention may be needed to balance the market forces. i.e. a large business can force out a small business, or find a way to cheat or scam consumers etc. (will be explaining this more in 'perfect competition' next). Adding more water to dilute the taste of the lemonade, or using rotten lemons and balancing it out with sugar are lemonade stand equivalents to where your parents ( kinda playing a similar role to Government here) may need to intervene (why? rotten lemons can be a health risk, you could harm your neighbors! Would you want your kids our selling bad lemonade to your neighbors & their kids?).


The following are some extracts to help explain what a market economy is:


From Investopedia:

What Does Market Economy Mean?

An economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses and there is little government intervention or central planning. This is the opposite of a centrally planned economy, in which government decisions drive most aspects of a country's economic activity.


Investopedia explains Market Economy

Market economies work on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation's well-being. These economies rarely engage in government interventions such as price fixing, license quotas and industry subsidizations.

While most developed nations today could be classified as having mixed economies, they are often said to have market economies because they allow market forces to drive most of their activities, typically engaging in government intervention only to the extent that it is needed to provide stability. Although the market economy is clearly the system of choice in today's global marketplace, there is significant debate regarding the amount of government intervention considered optimal for efficient economic operations.



From EconomyWatch.com:
Since the government will always have some level of regulatory control, no country operates as a free market in the strict sense of the word, but we generally say that market economies are those in which governments attempt to intervene as little as possible, while mixed economies include elements of both capitalism and socialism.


Note above that in a centrally planned economy EVERYTHING is planned by the government, i.e. how many crops are to be produced, which crops are to be produced, who get how much of the crop and in what proportion (it's like your parents plan and prepare your entire Lemonade stand themselves... and if they add salt instead of sugar you just have to live with it).

This means that if you don't want something (ex. rice) and want something else instead (ex. bread) you have no choice in the matter as the government has made that decision for you.

Also note that in a free market economy subsidies are unheard of as subsidies are meant to either protect a producer of goods or promote the development of an industry. In a free market economy the kind of oil subsidies that exist in the States would not exist. {In the economics model outlined here "regulators" are a form of control for the economic system.}

Think in terms of starting a lemonade stand (or set up your own local stand of some sort, such as lemonade).

How many people pass by your house on an average day? That is your base of possible customers.

The lemons and sugar are your investment and the signs and other marketing techniques you use is your attracting customers technique. Now estimate how many glasses of lemonade you'll be able to sell in a day or week and how much profit you could make.

This gives you your first idea of demand (possible buyers for lemonade) and supply (you - the maker of the lemonade) ... as you begin to explore how economics works in the real world.

Miscellaneous:

Make as much money as you can in 30 days at your Lemonade Stand!

Another math game

The following are a few extracts from an excellent article that explains how demand and supply works. Note: Demand is the desire to buy something (by an individual or group) and supply refers to the availability of that something. Economists use graphs to analyse changes in demand and supply and as a means to determine price and how variable its price may be based on the types of demand and supply situations being faced by an economy.

All the following extracts are from investopedia's article on demand and supply (please read the original article with it's graphs carefully as they will be used to explain economics in future posts);


A. The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more.


B. The Law of Supply

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

Time and Supply
Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent.

Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected rainy season; suppliers may simply accommodate demand by using their production equipment more intensively. If, however, there is a climate change, and the population will need umbrellas year-round, the change in demand and price will be expected to be  long term; suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand.


C. Supply and Demand Relationship

Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price.

Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.

Definition of ECONOMICS

1a : a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and servicesb : economic theory, principles, or practices <soundeconomics>2: economic aspect or significance <the economics of building a new stadium>3: economic conditions <current economics>


From Encyclopedia Britannica

"economics, Social science that analyzes and describes the consequences of choices made concerning scarce productive resources.

Economics is the study of how individuals and societies choose to employ those resources:

1. What goods and services will be produced,
2. How they will be produced, and
3. How they will be distributed among the members of society."