Warm-Up It’s been a long time since you were last in economics, but I bet you still used some...
-
Upload
tamsin-charles -
Category
Documents
-
view
215 -
download
1
Transcript of Warm-Up It’s been a long time since you were last in economics, but I bet you still used some...
Warm-UpIt’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…
ScarcityChoiceUtility
Trade-offsOpportunity costIncentives
Any of the four factors of production…
Before we start…an experiment Volunteers? Rules
Eat marshmallows one at a timeRecord 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 experimentYou can stop eating whenever you wantNo sharing of marshmallowsOnce you stop eating, you’re done – no starting
again later
Marginal Thinking andProduction Possibility Curve
Or: Economics at lunch
Before we start… 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 troubleAnd if I stay it will be doubleSo come on and let me know
How does he make his choice?
Link
Guiding QuestionsSo 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 definitionMarginal thinking is used for deciding how
much of something you will do or how many of something you want
DefinitionsMarginal benefit = the benefit (utility) you
receive from consuming one more unit of something
Marginal analysis chartslook like this…. Units(pieces of marshmallow, hours of work, slices of pizza)
Marginal Benefits
Total Benefit
1
2
Etc.
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 troubleAnd if I stay it will be doubleSo come on and let me knowHow 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 benefitsThe Production Possibilities Curve shows the
trade-offs between the production of two goods
The PPC demonstrates scarcity, choice, trade-offs, and marginal thinking… basically everything we’ve talked about!
Vocab: Marginal benefitMarginal cost
Diminishing marginal utility Production possibilities
curve