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Marginal
Analysis
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This is what you do when you make a decision.
You weigh your options, and make a choice.
If I do this, then I can’t do that…is it worth it?
Thinking on the Margin
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Marginal AnalysisIn economics the term marginal = additionalMarginal analysis (aka: thinking on the margin)
making decisions based on incrementsExample:• When you decide to go to the mall you consider the
additional benefit and the additional cost (your opportunity cost).
• Once you get to the mall, you continue to use marginal analysis when you shop, buy food, and talk to friends.
• Since your marginal benefits and costs can quickly change your analyzing them every second.
• What if your ex-girlfriend shows up? The Point: You will continue to do something as long as the marginal benefit is greater than the marginal cost
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Marginal Analysis video
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5 Key Economic Assumptions1. Society has unlimited wants and limited resources (scarcity). 2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off).3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.”4. Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.5. Real-life situations can be explained and analyzed through simplified models and graphs.
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Capital Goods
V
Consumer Goods15
Capital v Consumer Goods
Capital Goods
A capital good is any good deployed to help
increase future production. The most common capital
goods are property, plant and equipment, or PP&E.
Consumer Goods
Consumer goods are any goods that are not capital
goods; they are goods used by consumers and have no
future productive use.
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The 4 Factors of Production
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The Four Factors of ProductionALL resources can be classified as one of the
following four factors of production:
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1. Land -All natural resources that are used to produce goods and services. (Ex: water, sun, plants, animals)
2. Labor -Any effort a person devotes to a task for which that person is paid. (Ex: manual laborers, lawyers, doctors, teachers, waiters, etc.)
3. Capital -Physical Capital- Any human-made resource that is used
to create other goods and services ( Ex: tools, tractors, machinery, buildings, factories, etc.)
Human Capital- Any skills or knowledge gained by a worker through education and experience
4. Entrepreneurship -ambitious leaders that combine the other factors of production to create goods and services. • Examples-Henry Ford, Bill Gates, Inventors, Store
Owners, etc.
The Four Factors of Production
Entrepreneurs:1. Take The Initiative2. Innovate3. Act as the Risk Bearers
So they can obtain _________.
Profit = Revenue - Costs
PROFIT
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Resources Video
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PPC and PPF
Production Possibilities Curve
or
Production Possibilities Frontier
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Intro PPC video
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The Production Possibilities Curve
(PPC)Using Economic Models…
Step 1: Explain concept in wordsStep 2: Use numbers as examplesStep 3: Generate graphs from numbersStep 4: Make generalizations using graph
What is the Production Possibilities Curve?• A production possibilities curve (or frontier) is
a model that shows alternative ways that an economy can use its scarce resources
• This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.
4 Key Assumptions• Only two goods can be produced• Full employment of resources• Fixed Resources (Ceteris Paribus)• Fixed Technology
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A B C D E f14 12 9 5 0 00 2 4 6 8 10
Bikes
Computers
NOW GRAPH IT: Put bikes on y-axis and computers on x-axis
Production “Possibilities” Table
Each point represents a specific combination of goods that can be
produced given full employment of resources.
27Copyright ACDC Leadership 2015
Bik
es
Computers
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10
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6
4
2
0
0 2 4 6 8 10
A
B
C
D
E
G
Inefficient/ Unemployment
Impossible/Unattainable (given current resources)
Efficient
Production PossibilitiesHow does the PPG graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency?
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2 Bikes
2.The opportunity cost of moving from b to d is…
4.The opportunity cost of moving from f to c is…
3.The opportunity cost of moving from d to b is…
7 Bikes
4 Computer
0 Computers
5.What can you say about point G?
Unattainable
1. The opportunity cost of moving from a to b is…
Example:
Opportunity Cost
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The Production Possibilities Curve (or Frontier)
30Copyright ACDC Leadership 2015
PIZZA 0 1 2 3 4CALZONES 4 3 2 1 0
• List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.
• Constant Opportunity Cost- Resources are easily adaptable for producing either good.
• Result is a straight line PPC (not common)
Production PossibilitiesA B C D E
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PIZZA 20 19 16 10 0ROBOTS 0 1 2 3 4
• List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.
• Law of Increasing Opportunity Cost-• As you produce more of any good, the
opportunity cost (forgone production of another good) will increase.
• Why? Resources are NOT easily adaptable to producing both goods.
• Result is a bowed out (Concave) PPC
A B C D EProduction Possibilities
Copyright ACDC Leadership 2015
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Constant vs. Increasing Opportunity Cost
Corn
Wheat
Cactus
Pineapples
Identify which product would have a straight line PPC and which would be bowed out?
Copyright ACDC Leadership 2015
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Econmovies Episode 3: Monsters Inc.
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The Production Possibilities Curve and Efficiency
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Productive Efficiency-• Products are being produced in the
least costly way. • This is any point ON the Production
Possibilities CurveAllocative Efficiency-
• The products being produced are the ones most desired by society.
• This optimal point on the PPC depends on the desires of society.
Two Types of Efficiency
37Copyright ACDC Leadership 2015
Productive and Allocative Efficiency
Bik
es
Computers
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10
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6
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0 2 4 6 8 10
A
B
C
D
F
E
Which points are productively efficient?Which are allocatively efficient?
G
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Productively Efficient combinations are A through D
Allocative Efficient combinations depend on
the wants of society (What if this represents a
country with no electricity?)
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Why two types of efficiency?
Size 20 running shoes
Size 10 running shoes
A
Is combination “A” efficient?Yes and No. It is productively efficient but it is not the
combination society wants
2008 Audit Exam
2008 Audit Exam
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Shifting the Production Possibilities Curve
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4 Key Assumptions Revisited• Only two goods can be produced• Full employment of resources
• Fixed Resources (4 Factors)• Fixed Technology
What if there is a change?
3 Shifters of the PPC1. Change in resource quantity or quality 2. Change in Technology3. Change in Trade
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Production Possibilities
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Co
mp
ute
rs
Pizzas
What happens if there is an increase
in population?
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Production PossibilitiesC
om
pu
ters
Pizzas
What happens if there is an increase
in population?
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Production Possibilities
Co
mp
ute
rs
Pizzas
What if there is a technology improvement
in pizza ovens
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Production Possibilities
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Co
mp
ute
rs
Pizzas
What if there is a technology improvement
in pizza ovens
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Production Possibilities
Panama – Favors Consumer Goods
Mexico – Favors Capital Goods
Consumer goods
Cap
ital
Goo
ds
Current PPC
Future PPC
Consumer goods
Cap
ital
Goo
ds
Future PPC
Current PPC
Capital Goods and Future Growth
MexicoPanama49
Countries that produce more capital goods will have more growth in the future.
PPC PracticeDraw a PPC showing changes for each of the
following:Pizza and Computers (3)
1. New computer making technology2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)4. Destruction of power plants leads to severe
electricity shortage 5. Faster computer hardware6. Many workers unemployed7. Significant increases in education
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New computer making technology
Co
mp
ute
rs
Pizzas
Question #1
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A shift only for computers
Decrease in the demand for pizza
Co
mp
ute
rs
Pizzas
Question #2
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The curve doesn’t shift!A change in demand
doesn’t shift the curve
Mad cow disease kills 85% of cows
Co
mp
ute
rs
Pizzas
Question #3
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A shift inward only for Pizza
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Destruction of power plants
Cap
ital
Go
od
s (G
un
s)
Consumer Goods (Butter)
Question #4
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Decrease in resources decrease production possibilities for both
Faster computer hardware
Cap
ital
Go
od
s (G
un
s)
Consumer Goods (Butter)
Question #5
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Quality of a resource improves shifting the
curve outward
Many workers unemployed
Cap
ital
Go
od
s (G
un
s)
Consumer Goods (Butter)
Question #6
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The curve doesn’t shift!Unemployment is just a point inside the curve
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Significant increases in education
Cap
ital
Go
od
s (G
un
s)
Consumer Goods (Butter)
Question #7
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The quality of labor is improved. Curve shifts
outward.
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