Wednesday, June 18, 2008

The Cost of Something Is What You Give Up to Get It

The second of Mankiw's 10 principles, I think that Mankiw intended it to be reinforce the concept of opportunity costs.  It is also important in another way.  The "correct" price of any good or service is the price that was paid for it.

You here a lot of people and pundits complaining that the cost of gasoline is "too high" as they rip out their credit card to pay for filling up their Hummer.  Or complaining that no one wants to buy their house at "fair market value."

This isn't to say that their aren't bubbles or depressed markets, but you never really know for certain that you are in a bubble or under-priced market until its over do you?  After all everyone was convinced that housing prices would never go down and that e-commerce had ushered in a new economy that didn't follow the normal economic rules.

Then reality set in and every figured out that economic rules still apply and we were in a bubble after all. 

Hindsight is always 20/20.

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