DO NOW: p. 17
1. Read about
A. Marginal benefits and marginal costs
B. The Margin
2. Do
1.21 Applying Key Concepts
1.22 Think Fast!
Mick just “Can’t get NO SATISFACTION….No UTILITY!”
FOCUS: MARGINAL
THINKING
You may want to card these terms:
economic cost
margin
accounting cost
marginal cost
opportunity cost
marginal benefit
explicit/ implicit costs
utility
transaction costs
marginal utility
search & info costs
diminishing marginal utility
bargaining costs
policing & 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 TRADEOFF. 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 SELFINTEREST.
• 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 the
TIME 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 Utility
OBJ:
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
#2
#1
#3
#4
#5
#6
highlighter
1. Expresso
2. Expresso
3. Ice Cream
FOCUS: The Law of
Diminishing Marginal Returns
• OBJ.:
1. Calculate DMR with WIDGET Case
Study.
2. Experience DMR by operating a
FLUFFERNUTTER FACTORY!
11
10
9
8
7
6
5
3
1
-1
9
140 + 9 =
149
Sunk cost
7
5
2
-2
3
2
-2
1