1 / 22

FOCUS: MARGINAL THINKING

FOCUS: MARGINAL THINKING. You may want to card these terms: economic cost margin accounting cost marginal cost opportunity cost marginal benefit explicit/ implicit costs utility transaction costs marginal utility search & info costs diminishing marginal utility

rustym
Download Presentation

FOCUS: MARGINAL THINKING

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. FOCUS: MARGINALTHINKING You may want to card these terms: economic cost margin accounting cost marginalcost opportunity cost marginal benefit explicit/ implicit costs utility transaction costs marginal utility search & info costs diminishing marginal utility bargaining costs policing & enforcement costs Mick just “Can’t get NO SATISFACTION….No UTILITY!”

  2. FOCUS: Marginal Analysis OBJ. • Define and explain key terms. • Apply key concepts. • Analyze case study. (Widget Works) • Experience! (Fluffernutter Factory) How COST-BENEFIT ANALYSIS WORKS!

  3. REVIEW –KINDS OF COSTS: • Any given activity has 2 distinct kinds of COSTS • ACCOUNTING COST • OPPORTUNITY COST

  4. ACCOUNTING COST: • A simple MONETARY COST of a good or service $$$$$$$$$$$ • An “OUT-OF-POCKET” expense • An EXPLICIT COST • A DIRECT COST

  5. 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 • An INDIRECT COST

  6. ECONOMIC COST: Accounting Cost +Opportunity Cost TOTAL ECONOMIC COST Explicit Cost (DIRECT) +Implicit Cost (Indirect) TOTAL ECONOMIC COST ….BUT

  7. Economic exchanges ALSO have other kinds of costs, like, for instance… • TRANSACTION COSTS • SEARCH & INFORMATION COST • BARGAINING COST • POLICING & ENFORCEMENT COST

  8. SEARCH & INFORMATION COST: • Time spent to determine • if desired good is available • best price (comparative shopping)

  9. 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)

  10. 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)

  11. REVIEW: 4 Key Economic Assumptions • People are RATIONAL. • People are GREEDY (wants = unlimited). • People act in their own SELF-INTEREST. • RESOURCES are SCARCE.

  12. COST-BENEFIT ANALYSIS: • Making a list of the PROS & CONS of a decision • Weighing the COSTS against the BENEFITS

  13. OPTIMIZATION: • GOAL • Maximize BENEFIT • Minimize COST • Requires OPTIMAL (most efficient) ALLOCATION (dividing up for use) of resources • Examines TRADE-OFFS

  14. THINK ABOUT IT • You are on the city council. Your city needs a new bridge. Planners say the new bridge will cost $ 1 million, so you budget $1 mil. • You’ve already spent $1 million, but the bridge isn’t finished. Builders say it will cost another million dollars to finish resulting in a total cost of $2 million • What should you consider when you decide whether or not to spend another million bucks to finish the bridge?

  15. 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!”

  16. UTILITY & SUPPLY and DEMAND: • DEMAND SIDE – the “buy” side” Law of Diminishing Marginal Utility • SUPPLY SIDE – the “sell side” Law of Diminishing Marginal Returns

  17. FOCUS: Utility and the Law of Diminishing Marginal Utility OBJ: • Define key terms. utility, marginal utility, diminishing marginal utility, “util” • Analyze case studies.

  18. TERMS: • Utility: the ability of a good or service to SATISFY 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

  19. 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

  20. #2 #1 #3 #4 #5 #6 highlighter 1. Expresso 2. Expresso 3. Ice Cream

  21. 11 10 9 8 7 6 5 3 1 -1 Uh-oh! 9 140 + 9 = 149 Sunk cost 7 5 2 -2 2 -2 3 1

  22. 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 !!!!!!

More Related