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Page 1: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

FOCUS: MARGINALFOCUS: MARGINALTHINKINGTHINKING

FOCUS: MARGINALFOCUS: MARGINALTHINKINGTHINKING

DO NOW:DO NOW:In your notebook, define In your notebook, define

marginmarginmarginalmarginal costcostmarginal benefitmarginal benefitutilityutilitymarginal utilitymarginal utilitydiminishing marginal utilitydiminishing marginal utility

Mick just “Can’t get NO SATISFACTION….No UTILITY!”

Page 2: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

FOCUS: MARGINALFOCUS: MARGINALTHINKINGTHINKING

FOCUS: MARGINALFOCUS: MARGINALTHINKINGTHINKING

DO NOW:DO NOW:In your notebook, define In your notebook, define

marginmarginmarginalmarginal costcostmarginal benefitmarginal benefitutilityutilitymarginal utilitymarginal utilitydiminishing marginal utilitydiminishing marginal utility

Mick just “Can’t get NO SATISFACTION….No UTILITY!”

Page 3: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

FOCUS: Marginal Analysis

OBJ.1. Define and explain key terms.2. Apply key concepts.3. Analyze case study. (WidgetWorks)

How COST-BENEFIT ANALYSIS WORKS!

Page 4: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

KINDS OF COSTS:

• Any given activity has 2 distinct kinds of COSTS– ACCOUNTING COST– OPPORTUNITY COST

Page 5: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

ACCOUNTING COST:

• A simple MONETARY COST of a good or service $$$$$$$$$$$

• An “OUT-OF-POCKET” expense• An EXPLICIT COST

Page 6: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

OPPORTUNITY COST• The value of the next best alternative to

any given activity, good or service• Reflects the nature of a TRADE-OFF. By

choosing to ALLOCATE resources in one way, you decide NOT to use them in any other

• An IMPLICIT COST

Page 7: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

ECONOMIC COST:

Accounting Cost+Opportunity Cost TOTAL ECONOMIC COST

Page 8: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

TRANSACTION COSTS:

• Economic exchanges ALSO have TRANSACTION COST– SEARCH & INFORMATION COST– BARGAINING COST– POLICING & ENFORCEMENT COST

Page 9: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

SEARCH & INFORMATION COST:

• Time spent to determine– if desired good is available– best price (comparative shopping)

Page 10: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

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)

Page 11: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

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)

Page 12: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

REVIEW: 4 Key Economic Assumptions

• People are RATIONAL.• People are GREEDY (wants =

unlimited).• People act in their own SELF-

INTEREST.• RESOURCES are SCARCE.

Page 13: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

COST-BENEFIT ANALYSIS:

• Making a list of the PROS & CONS of a decision

• Weighing the COSTS against the BENEFITS

Page 14: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

OPTIMIZATION:

• GOAL– Maximize BENEFIT– Minimize COST

• Requires OPTIMAL (most efficient) ALLOCATION of resources

• Examines TRADE-OFFS

Page 15: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

Considering theTIME 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!”

Page 16: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

UTILITY & SUPPLY and DEMAND:

• DEMAND SIDE – the “buy” side” Law of Diminishing Marginal Utility

• SUPPLY SIDE – the “sell side” Law of Diminishing Marginal

Returns

Page 17: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

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

Page 18: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

FOCUS: Utility and the Law of Diminishing Marginal

UtilityOBJ:1. Define key terms.

utility, marginal utility, diminishing marginal utility, “util”

2. Analyze case studies.

Page 19: FOCUS: MARGINAL THINKING DO NOW: In your notebook, define margin marginal cost marginal benefit utility marginal utility diminishing marginal utility Mick.

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

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9

1

Sunk cost

3

149

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highlighter

2. Expresso 3. Ice Cream 1. Expresso

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FOCUS: 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)

COPY INTO YOUR NOTES NOW !!!!!!