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!”

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!”

FOCUS: Marginal Analysis

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

How COST-BENEFIT ANALYSIS WORKS!

KINDS OF COSTS:

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

ACCOUNTING COST:

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

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

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

ECONOMIC COST:

Accounting Cost+Opportunity Cost TOTAL ECONOMIC COST

TRANSACTION COSTS:

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

SEARCH & INFORMATION COST:

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

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)

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)

REVIEW: 4 Key Economic Assumptions

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

unlimited).• People act in their own SELF-

INTEREST.• RESOURCES are SCARCE.

COST-BENEFIT ANALYSIS:

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

• Weighing the COSTS against the BENEFITS

OPTIMIZATION:

• GOAL– Maximize BENEFIT– Minimize COST

• Requires OPTIMAL (most efficient) ALLOCATION of resources

• Examines TRADE-OFFS

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!”

UTILITY & SUPPLY and DEMAND:

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

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

Returns

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

FOCUS: Utility and the Law of Diminishing Marginal

UtilityOBJ:1. Define key terms.

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

2. Analyze case studies.

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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1

Sunk cost

3

149

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2. Expresso 3. Ice Cream 1. Expresso

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 !!!!!!