Thinking and working like an economist Today: Marginal benefit Marginal cost Graphing.

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Thinking and working like an economist Today: Marginal benefit Marginal cost Graphing
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Transcript of Thinking and working like an economist Today: Marginal benefit Marginal cost Graphing.

Thinking and working like an economist

Today: Marginal benefitMarginal cost

Graphing

First: Crashers

If you did not sign the “crash” list on Monday, you are not able to add this Econ 1 lecture

If you were here Monday and have not let me know that you are here, please do so now

Why am I taking Econ 1? Hopefully, you have an interest in

economics If not, I hope to teach you

something that you will find important to your life later on Lessons learned in this class could help

you make good decisions later on Good decisions are usually correlated with

more money

Who is in the light blue shirt?(Come to class to find out)

Poker and economics Opportunity cost

Don’t ask “what will make me money?” Ask “what will make me the most money?” For poker players, you can read more about

opportunity cost at http://www.cardplayer.com/author/article/all/248/9463

Game theory Understanding your opponents can give you

a big edge in life

Last time… Introduction to the 7 core principles of

economics Scarcity Cost-benefit analysis Incentives matter Comparative advantage Increasing opportunity cost Equilibrium Efficiency

Today: Begin Unit 1Basics of supply and demand

Why is economics important? A few tools necessary to be a good

economist Thinking like an economist Marginal benefit Marginal cost Working with graphs

Thinking like an economist

Examples Surfing

Health insurance Driving to work

Find fastest way to work Sugar prices in the U.S.

See F/B

How to successfully think like an economist Come to lecture Read the text Think, think, think Try to understand the “Economic

Naturalist” problems Ask questions in lecture, section, and

office hours Understand what is going on before

moving to the next topic

Why is economics important to study?

Study people’s and firms’ choices Theorize general tendencies of

behavior Find ways to increase efficiency of

the economy If there are more goods and

services available, then there is “more of the pie” to go around

What is fair? Economists generally do not study

this, since it is difficult to determine what is “fair”

Instead, when possible, economists often try to find situations in which some people can be made better off without hurting others These situations are called Pareto

improvements

Potential Pareto improvements

International trade Removal of complaints from

overbooked flights Replacing pollution controls with

marketable permits (advanced idea)

Improving property rights

What are some things that economists study?

Individual markets (microeconomics)

An economy as a whole (macroeconomics)

This class addresses microeconomic issues

Individual topics include: Highway

congestion Marriage markets Education The environment Labor markets Health International trade

Marginal analysis

One of the most important ideas in economics

When you hear “marginal,” think “one additional unit” Example: F/B describe marginal benefit

as “the increase in total benefit that results from carrying out one additional unit of an activity” (p. 12)

Marginal analysis

An example You have $10 available to buy energy

drinks today Each energy drink costs you $2

Any money left over can be used to buy other items

Should you buy 5 energy drinks today?

Solution

Buy an additional energy drink if Marginal Benefit (MB) exceeds Marginal Cost (MC)

If MB = MC, you are indifferent about buying an additional energy drink

If MB < MC, you will not buy an additional energy drink

Your benefit schedule

# of drinks Total benefit ($) MB ($) Avg. benefit

0 0 N/A5

1 5 53

2 8 42.5

3 10.5 3.51.5

4 12 3-1

5 11 2.2

What should we do?

# of drinks Total benefit ($) MB ($) Avg. benefit

0 0 N/A5

1 5 53

2 8 4

2.53 10.5 3.5

1.54 12 3

-15 11 2.2

We should buy the third energy drink since MB > MC (2.5 > 2)

We should not buy the fourth energy drink since MB < MC (1.5 < 2)

Note that we are NOT maximizing average benefit or total benefit

Surplus

# of drinks Total benefit ($) MB ($) Avg. benefit

0 0 N/A5

1 5 53

2 8 4

2.53 10.5 3.5

1.54 12 3

-15 11 2.2

Economics surplus is benefit minus cost

Marginal surplus 1st unit: 5 – 2 = 3 2nd unit: 3 – 2 = 1 3rd unit: 2.5 – 2

= .5 Total surplus for

consuming 3 units: $4.50

Thinking like an economist: MB/MC and grades Your choices over the next 10

weeks will help determine the grade you get in this class “Should I choose to spend a lot of time

studying and try to get a good grade?” “Should I choose to sleep in and miss

lecture?” Choices like these will help

determine your grade

Working with graphs

Working with graphs Some reminders

of graphs Label axes Label curves Label dollar

amounts, quantities, etc., when needed

Working with graphs: Slope

Supply: Slope is rise (red line) divided run (green line), or 6 divided by 4, which is 1.5 here

Working with graphs: Equations of lines

Demand: y = mx + b

m is slope (-1)

b is y-int. (10)

y = -x + 10