Warm-Up
 It’s been a long time since you were last in economics,
but I bet you still used some economic thinking…
 Tell me about how you demonstrated some economic
thinking over the weekend. Be sure to explain both the
CONCEPT and the EXAMPLE in detail. (If you write
less than a full paragraph, it’s probably not explained
enough.)
 Some concepts you might want to consider…
 Scarcity
 Choice
 Utility
 Trade-offs
 Opportunity cost
 Incentives
 Any of the four
factors of
production…
Before we start…an experiment
 Volunteers?
 Rules
 Eat marshmallows one at a time
 Record how happy/satisfied you are after EACH
marshmallow (how much utility that marshmallow
brings you)
 Must eat continuously (no unreasonable pauses)
 Do not drink water during the experiment
 You can stop eating whenever you want
 No sharing of marshmallows
 Once you stop eating, you’re done – no starting again
later
Or: Economics at lunch
Before we start…
 The lead singer of the Clash has a problem:
Link
Should I stay or should I go now?
Should I stay or should I go now?
If I stay there will be trouble
And if I stay it will be double
So come on and let me know
 How does he make his choice?
Guiding Questions
So far, we’ve thought a lot about making choices to use
our scarce resources most efficiently, and how to
compare costs and benefits to make those choices. But,
our choices aren’t always all-or-nothing decisions, like
“Freddy’s or Subway for lunch?” Sometimes our
choices are, “how many fries should I eat for lunch?”
 What is marginal analysis, and how do we use it?
 How do producers use marginal analysis to run their
businesses?
Marginal Thinking – A definition
 Marginal thinking is used for deciding how much of
something you will do or how many of something
you want
Definitions
 Marginal benefit = the benefit (utility) you receive
from consuming one more unit of something
Marginal analysis charts
look like this….
Units
(pieces of marshmallow,
hours of work, slices of
pizza)
1
2
Etc.
Marginal
Benefits
Total Benefit
Let’s check in with our contestants…
 Volunteers:
 How many marshmallows did you eat?
 Why did you stop eating?
 What would have happened if you ate one more?
 What was the scarce resource in this example?
More Definitions…
 Marginal cost = the cost you receive from one more
unit of something
 Law of diminishing marginal utility = A consumer
eventually reaches the point where he/she receives less
satisfaction from each additional (marginal) unit of a
good consumed

In other words: the more you consume of something, the less
you value one additional unit of it
Too Many Cooks in the Kitchen?
 You’re opening a new restaurant, and you’re trying to
decide how many kitchen staff to hire. Obviously,
more is better – right? But you’ve also heard the phrase
“too many cooks in the kitchen,” and want to perform
some marginal analysis to discover the ideal number of
kitchen staff you should hire.
 Each new hire costs $10/hour. The marginal benefit of
each new staff member is on the next slide…
Units
Marginal
Benefits
Total
Benefit
Marginal
Cost
1
$50
$50
$10
2
$30
$80
$10
3
$20
$100
$10
4
$10
$110
$10
5
$5
$115
$10
6
–$5
$110
$10
Let’s come back to the Clash…
 The lead singer of the Clash has a problem:
Should I stay or should I go now?
Should I stay or should I go now?
If I stay there will be trouble
And if I stay it will be double
So come on and let me know
 How does he make his choice?
A: He should stay, as long as his marginal benefits outweigh
his marginal costs. If his marginal costs outweigh his
benefits, he should go!
How do producers actually use
marginal analysis…?
 The production possibility curve allows us to compare
the marginal costs and benefits between 2 production
options.
 The PPC is a graph that shows all the various
combinations that can be produced when ALL
resources are used most efficiently, given a current
level of technology.
Let’s work with an example…
Laurasians
 You live in Laurasia. Like most Laurasians, you like to
eat pizzas and decorate with fine rugs. The more
pizzas and rugs you can get, the happier you are.
Unfortunately, making these goods takes time, and
you only have six hours per day for production. In one
hour you are able to make four pizzas OR two rugs, but
not both.
 Cut out your production cards now.
Production Possibilities Curve
for Laurasians
To sum up…
 Rational economic thinking is made at the margin,
comparing the costs and benefits
 The Production Possibilities Curve shows the tradeoffs between the production of two goods
 The PPC demonstrates scarcity, choice, trade-offs, and
marginal thinking… basically everything we’ve talked
about!
 Vocab:
 Marginal benefit
 Marginal cost
 Diminishing marginal utility
 Production possibilities curve