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1.1. Read aboutRead aboutA. Marginal benefits and marginal
costsB. The Margin
2.2. Do Do 1.21 Applying Key Concepts1.22 Think Fast!
Mick just “Can’t get NO SATISFACTION….No UTILITY!”
FOCUS: MARGINALFOCUS: MARGINALTHINKINGTHINKING
FOCUS: MARGINALFOCUS: MARGINALTHINKINGTHINKING
You may want to card these terms:You may want to card these terms:economic costeconomic cost marginmarginaccounting costaccounting cost marginalmarginal costcostopportunity costopportunity cost marginal benefitmarginal benefit
explicit/ implicit costsexplicit/ implicit costs utilityutilitytransaction coststransaction costs marginal utilitymarginal utility
search & info costssearch & info costs diminishing marginal utilitydiminishing marginal utility bargaining costsbargaining costs policing & enforcement costspolicing & enforcement costs
Mick just “Can’t get NO SATISFACTION….No UTILITY!”
FOCUS: Marginal Analysis
OBJ.1. Define and explain key terms.2. Apply key concepts.3. Analyze case study. (Widget Works)4. Experience! (Fluffernutter Factory)
How COST-BENEFIT ANALYSIS WORKS!
REVIEW –KINDS OF COSTS:
• Any given activity has 2 distinct kinds of COSTS– ACCOUNTING COST– OPPORTUNITY COST
ACCOUNTING COST:
• A simple MONETARY COST of a good or service $$$$$$$$$$$
• An “OUT-OF-POCKET” expense• An EXPLICIT COST• A DIRECT COST
OPPORTUNITY COST• The value of the next best alternative to any
given activity, good or service• Reflects the nature of a TRADE-OFF. By
choosing to ALLOCATE resources in one way, you decide NOT to use them in any other
• An IMPLICIT COST• An INDIRECT COST
ECONOMIC COST:Accounting Cost+Opportunity Cost TOTAL ECONOMIC COST
Explicit Cost (DIRECT)+Implicit Cost (Indirect) TOTAL ECONOMIC COST
….BUT
Economic exchanges ALSO have other kinds of costs,
like, for instance…
•TRANSACTION COSTS– SEARCH & INFORMATION COST– BARGAINING COST– POLICING & ENFORCEMENT COST
SEARCH & INFORMATION COST:
• Time spent to determine– if desired good is available– best price (comparative shopping)
BARGAINING COST:• Cost of time it takes
– for the parties to come to an acceptable agreement (negotiate a deal)
– to draw up a contract• Lawyer• Notary public• State bureaucracy (permit, license,
corporate charter)
POLICING & ENFORCEMENT COST:
• Time and effort spent to– Ensure that the other party sticks to
the agreed terms– Warranty rights are applied (may
involve lawyer & court costs)
REVIEW: 4 Key Economic Assumptions
• People are RATIONAL.• People are GREEDY (wants =
unlimited).• People act in their own SELF-
INTEREST.• RESOURCES are SCARCE.
COST-BENEFIT ANALYSIS:
• Making a list of the PROS & CONS of a decision
• Weighing the COSTS against the BENEFITS
OPTIMIZATION:
• GOAL– Maximize BENEFIT– Minimize COST
• Requires OPTIMAL (most efficient) ALLOCATION (dividing up for use) of resources
• Examines TRADE-OFFS
THINK ABOUT IT• You are on the city council. Your city needs a
new bridge. Planners say the new bridge will cost $ 1 million, so you budget $1 mil.
• You’ve already spent $1 million, but the bridge isn’t finished. Builders say it will cost another million dollars to finish resulting in a total cost of $2 million
• What should you consider when you decide whether or not to spend another
million bucks to finish the bridge?
Considering theTIME FACTOR!
FOCUS: SUNK COSTS• Incurred in the PAST!• Impossible to recover• Economists don’t consider them
because, “Oh, well…. You can’t get ‘em back, so it’s not RATIONAL!”
IF…• The expected BENEFIT is greater than the
additional or MARGINAL COST…then DO IT!
• The additional or MARGINAL COST is greater than the expected BENEFIT…
then DON’T DO IT!
UTILITY & SUPPLY and DEMAND:
• DEMAND SIDE – the “buy” side” Law of Diminishing Marginal Utility
• SUPPLY SIDE – the “sell side” Law of Diminishing Marginal
Returns
THE GOLDEN RULE• Produce or consume where
MC < MB
We interrupt this class for an economic simulation
game.
•WELCOME to Mrs. Shivers’s
FLUFFERNUTTER FACTORY
FOCUS: Utility and the Law of Diminishing Marginal
UtilityOBJ:1. Define key terms.
utility, marginal utility, diminishing marginal utility, “util”
2. Analyze case studies.
TERMS:• Utility: the ability of a good or service to
SATISFY a need/want = satisfaction• Marginal: “one more unit” of something; the
difference between two things• Marginal analysis: what’ll happen if I produce
or consume one more unit?• Marginal cost – the cost of producing or
consuming one more • Marginal benefit – the benefit of producing or
consuming one more
THE LAW OF DIMINISHING MARGINAL UTILITY
• UTILITY – the amount of SATIFACTION you get out of consuming another unit of something
• THE LAW OF DIMINISHING MARGINAL UTILITY - each additional unit provides less
• UTILITY or SATISFACTION• “UTILS” : imaginary units used to measure
satisfaction or UTILITY
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2. Expresso 3. Ice Cream 1. Expresso
#1 #2
#6
#4
#5
#3
FOCUS: The Law of Diminishing Marginal Returns• OBJ.:
1.Calculate DMR with WIDGET Case Study.
2.Experience DMR by operating a FLUFFERNUTTER FACTORY!
9
1
Sunk cost
3
149
11 10 9 8 7 6 5 3 1 -1
140 + 9 =
7 5 2 -2
2-2