Economics: Class 12
9/29/14
Plan for the Week
 Monday – Review Chapter 1
 Tuesday – Review Chapter 3 & 4
 Wednesday – Review Chapters 5
 Friday – Exam 1 - Chapters (1, 3, 4, and 5)
Definition of Key Terms

Economics
 The study of how people choose to allocate their scarce resources. The study of the production,
distribution , and consumption of goods and services

Economic Growth


Marginal Analysis


The additional benefit derived from producing one more unit of a good or service
Marginal Costs


The analysis of the benefits and cost of the marginal unit of a good or input. If increasing the output adds
more to total benefits than to total costs. The output should be increased.
Marginal Benefits


The growing ability of the economy to produce economic growth. The main ways to have growth are to
invest more, innovate, increase specialization, and increase inputs
The additional cost incurred by producing one more unit of a good or service
Net Benefits

Net Benefits = Total Benefits (Revenue) – Total Costs
Definition of Key Terms
 Opportunity Cost
 Value of the best alternative that had to be forgone in order to undertake a
given course of action. The real cost of an item: what you must give up in order
to get it.
 Production Possibility Curve
 A graph showing combinations of goods that an individual, a firm, or an
economy is capable of producing
 Scarcity
 A condition that exists when current resources are inadequate to provide
for all of people’s wants. A good is scarce if another unit of the good would
benefit someone
 Trade-offs
 A comparison of the costs and benefits of doing something.
Production Possibility
Curves and Opportunity
Cost
The worker is currently spending one
hour making chairs and three hours
making benches. What is the
opportunity cost per chair of
spending a second hour in chair
making (assuming the worker is still
limited to four hours)? What is the
dollar value of this opportunity cost
if benches sell for $12. If chairs sell
for $25, how many hours should be
spent making chairs?
Hint: the opportunity cost per unit of
the good gained is the loss divided
by the gain
Chairs
Benches
Time
Spent
(hours)
Product
Made
Time
Spent
(hours)
Produc
t Made
0
0
4
20
1
4
3
18
2
7
2
14
3
9
1
8
4
10
0
0
Marginal Analysis
 Key Procedure for Using Marginal Analysis
 Identify the control variable (which good is being increased by
one more unit)
 Determine what the increase in total benefits would be if one
more unit of the control variable were added. This is known as
the marginal benefit of the added unit
 Determine what the increase in total costs would be if one more
unit of the control variable were added. This is the marginal
cost of the added unit
 If the unit’s marginal benefit exceeds (or equals) its marginal
cost, it should be added.
Marginal Analysis Problem
 Acme Manufacturing has trained Worker A at a cost of
$30,000 and Worker A is worth $70,000 to Acme. A worker’s
worth to a firm refers to how much the firm presently values
all the future profits it expects to make from the worker,
these profits being the revenues produced by the worker less
wages and fringe benefits. Later, Acme has the opportunity
to hire Worker B. Worker B would cost $30,000 to train but
would be worth $90,000. However, to hire Worker B, Acme
must fire Worker A. Should Acme hire Worker B?
Do Later
 Work on the Practical Application Questions: Do numbers 1-9
skip 5 and 7