FOCUS: MARGINAL
THINKING
DO NOW:
In your notebook, define
margin
marginal cost
marginal benefit
utility
marginal utility
diminishing marginal utility
Mick just “Can’t get NO SATISFACTION….No UTILITY!”
FOCUS: MARGINAL
THINKING
DO NOW:
In your notebook, define
margin
marginal cost
marginal benefit
utility
marginal utility
diminishing marginal utility
Mick just “Can’t get NO SATISFACTION….No UTILITY!”
TERMS:
• Utility: the ability of a good or service to
SATIFY 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
FOCUS: Marginal
Analysis
OBJ.
1. Define and explain key terms.
2. Apply key concepts.
3. Analyze case study. (WidgetWorks)
How COST-BENEFIT ANALYSIS
WORKS!
Let’s Review 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
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
ECONOMIC COST:
Accounting Cost
+Opportunity Cost
TOTAL ECONOMIC COST
TRANSACTION COSTS:
• Economic exchanges ALSO have
TRANSACTION COST
– 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 of resources
• Examines TRADE-OFFS
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!”
UTILITY & SUPPLY and
DEMAND:
• DEMAND SIDE – the “buy” side”
Law of Diminishing Marginal Utility
• SUPPLY SIDE – the “sell side”
Law of Diminishing Marginal Returns
TERMS:
• Utility: the ability of a good or service to
SATIFY 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
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.
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
1. Expresso
2. Expresso
3. Ice Cream
11
10
9
8
7
6
4
1
-1
9
149
Sunk cost
7
5
2
-2
3
2
-1
1
Costs or Benefits which Occur to
Those NOT Party to a
Transaction: 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)
EXAMPLES OF MARKET FAILURE!