focus: marginal thinking you may want to card these terms: economic costmargin accounting...
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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!”
UTILITY & SUPPLY and DEMAND:
• DEMAND SIDE – the “buy” side” Law of Diminishing Marginal Utility
• SUPPLY SIDE – the “sell side” Law of Diminishing Marginal
Returns
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
highlighter
2. Expresso 3. Ice Cream 1. Expresso
#1 #2
#6
#4
#5
#3
9
1
Sunk cost
3
149
11 10 9 8 7 6 5 3 1 -1
140 + 9 =
7 5 2 -2
2-2
FOCUS: EXTERNALITIES• An EXTERNALITY is a COST or a
BENEFIT that affects a third party not involved in a transaction
• TYPES:– POSITIVE (ex.: smelling my neighbor’s
roses)– NEGATIVE (ex.: pollution)
COPY INTO YOUR NOTES NOW !!!!!!