Saturday, November 1, 2008

Economic Thought: Week One Discussion Board

Week One Discussion Board for Economic Thought Course: My Responses to Questions

In what sense does leisure have an opportunity cost and how does the modern decision to choose more leisure differ from that of medieval days?
Leisure has an opportunity cost in the sense that when I choose leisure, my opportunity cost is being productive. However that would assume that I lay idle doing absolutely nothing. If I go to the movies, go to Walt Disney World, or do anything that involves the exchange of goods and service, I am choosing leisure AND am still participating in the market economy. This is the major difference between the modern decision to choose more leisure than the medieval days. In times past, leisure was not only scarce, but it was less likely to involve any market participation.

Distinguish between debt and equity capital and how differing levels of each mean different levels of reward for that average owner of each
Debt and equity capital are very easy to distinguished. With debt capital you are OWED something. With equity capital you OWN something. If I hold debt I am owed money that I have previously loaned out, as well as any interest borne on the loan. This can be in the form of a bond, t-bill, promissory note, etc. It is usually set on a time schedule, and my interest return will generally not fluctuate too severely, depending on the type of debt I hold. The risk I assume is not being paid back my money if the borrower defaults, e.g. a company is liquidated and cannot repay its bonds. The higher the credit rating, the lower the potential risk and reward. The lower the credit rating, the higher the potential risk and reward. 

With equity capital, I own a stake in a company. As the company grows, my stake grows, as well as the value of that stake. My potential upside is virtually limitless, and my potential downside is the value of my stake going to zero. Reward and risk is not as quantifiable when dealing with equities, largely because equity prices can be misrepresented due to such things investor emotion or government intervention. Reward and risk is comparable to the debt market in some respects, that is to say the more established the company, the less risk/reward and vice versa.

What is scarcity and why does it exist?  Furthermore, how is it measured?
Scarcity is the problem of the wants and needs and humans as they relate to finite resources. Scarcity exists because, like life itself, all resources, goods, services are finite. Scarcity is measured by prices set according to the supply of and the demand for the finite resources.

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