Alchian and Allen, opportunity cost, and the kid in the candy store

Knowledge Problem

The new Alchian and Allen book Universal Economics is out. The publisher reports the authors have collaborated to produce a ”fresh, final presentation of the analytical tools” contained in their famous (among a certain kind of economics nerd) textbooks University Economics and Exchange and Production.

In introducing the idea of opportunity cost in the new book, Alchian and Allen give us a “kid in the candy store example.” Alchian and Allen get their explanation wrong.

From the new Alchian and Allen:

A candy-store owner told Annie: “I want to give you some candy for free. Select whichever one you want.” She responded, “Thank you. But it’s not free!” Annie’s smart! She recognized that choosing her favorite, Snickers, is costly. She would have to give up here next best-liked candy, a bag of M&Ms—her alternate personal highest-worth good. Costs can occur in several forms, and some things that are not…

View original post 1,425 more words

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This entry was posted in applied price theory on by .

About Jim Rose

Utopia - you are standing in it promotes a classical liberal view of the world and champion the mass flourishing of humanity through capitalism and the rule of law. The origin of the blog is explained in the first blog post at https://utopiayouarestandinginit.wordpress.com/2014/03/12/why-call-my-blog-utopia-you-are-standing-in-it/

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