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The Economic Way of Thinking

The Economic Way of Thinking. Marginal Analysis Comparing benefits and costs. Marginal – means “extra, additional, one more” Marginal Cost (MC) – What does it cost to go to the next level or to get one more item?

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The Economic Way of Thinking

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  1. The Economic Way of Thinking Marginal Analysis • Comparing benefits and costs. • Marginal – means “extra, additional, one more” • Marginal Cost (MC) – What does it cost to go to the next level or to get one more item? • Marginal Benefit (MB) – What pleasure or “utility” do you get out of the next level or item? • Incentive • Why do we act? • We do it when MB is greater than or equal to MC.

  2. Marginal Analysis Example

  3. PRODUCTION POSSIBILITIES Assumes... • Full Employment • Full Production • Fixed Resources • Fixed Technology • Two Goods for example...

  4. PIZZA PRODUCTION POSSIBILITIES A Consumer Good Assumes... Full Employment and Productive Efficiency Fixed Resources Fixed Technology Two Goods for example...

  5. Robots PRODUCTION POSSIBILITIES A Capital Good Assumes... Full Employment and Productive Efficiency Fixed Resources Fixed Technology Two Goods for example...

  6. PRODUCTION POSSIBILITIES What if we could only produce ... 10,000 Robots or 400,000 Pizzas Using all of our resources, to get some pizza, we must give up some robots! for example...

  7. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands)

  8. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  9. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  10. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  11. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  12. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  13. PRODUCTION POSSIBILITIES in table form PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form Robots (thousands) Pizzas (hundred thousands)

  14. PRODUCTION POSSIBILITIES Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C W Attainable & Efficient Robots (thousands) D Attainable but Inefficient E Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands)

  15. PRODUCTION POSSIBILITIES Limited Resources means a limited output... An economy must sacrifice some of productX to obtain more of product Y.

  16. Law of IncreasingOpportunity Cost • Economic resources are not completely adaptable to other uses • To make more of X it costs more and more of Y • This makes the PPC: • Bowed out from the origin • Concave

  17. Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Robots (thousands) Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Unemployment & Underemployment Shown by Point U More of either or both is possible U

  18. Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Notes... Economic Growth Robots (thousands) Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Unemployment & Underemployment Shown by Point U Increase in resource supplies Better resource quality Technological advances Capital Goods More of either or both is possible U

  19. PRODUCTION POSSIBILITIES Q A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Economic Growth B’ C’ Robots (thousands) D’ E’ Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands)

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