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3. Decisions are made at the margin.

Explore the concepts of marginal analysis and cost-benefit analysis in economics to understand how individuals make decisions based on expected costs and benefits. Learn about the importance of analyzing marginal costs and benefits in various scenarios and the factors that influence decision-making.

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3. Decisions are made at the margin.

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  1. 3. Decisions are made at the margin. 12 Key Elements of Economics

  2. Major Premise We all examine costs and benefits when making choices. “All social phenomena emerge from the choices that individuals make in response to expected costs and benefits to themselves.” -Paul Heyne (1931-2000)

  3. Cost-Benefit Analysis • IF… the Benefit is greater than the Cost then do it! • IF… the Cost is greater than the Benefit then don’t do it!

  4. Marginalism… • Few, if any, decisions are “all-or-nothing”. • Marginal means additional or one more. • We are constantly facing marginal choices. • To get the most out of our resources, we should only take an action when the additional benefits are greater than the additional costs.

  5. Thinking on the Margin

  6. Example – Hiring Workers • Factors that influence productivity: • Physical abilities • Level of education • Equipment (capital) available • How many other workers • Sometimes hiring another worker increases productivity, sometimes it does not…

  7. 1 Kitchen - How Many Cooks? No Cook – No Pizza ! 10 10 Good cook – does everything himself 25 15 1 baker and 1 prep 45 1 baker+1 prep+1 waiter – what a system! 20 55 10 Extra guy – helps who ever is behind 55 0 Things aren’t so hectic 40 -15 Get her out of the way ! Would you hire 6 cooks? What's the most you'd be willing to pay cook #4? NO $100

  8. Marginal Decision Examples… • How clean is your house? • Do you clean 100% of the dirt and clutter? • How about when company is coming? • How about when selling your house? • In each case, you clean to the point where the marginal costs outweigh the expected marginal benefits!

  9. Marginal Analysis • How much of something should you do? • Keep going until Marginal Cost = Marginal Benefit

  10. Maria wishes to buy gasoline and have her car washed. She finds that if she buys 9 gallons of gasoline at $2.50 per gallon, the car wash costs $2, but if she buys 10 gallons of gasoline, the car wash is free. For Maria, the marginal cost of the tenth gallon of gasoline is zero 50 cents $2.00 $2.50 Answer: 50 cents (=$2.50 - $2.00) Consider the following situation.

  11. Cost-Benefit Analysis... • Difficult for government to perform with certainty because of the absence of market prices and quantities needed to estimate social benefits and resource costs. • Value of life, consumer’s time, aesthetics are difficult for “experts” to determine. • This is why it is often best to let individuals make decisions for themselves

  12. Output, Additional (Marginal) Product, and Additional (Marginal) RevenueT-shirts price (P) = $_________ $10 5 $50 8 $80 3 6 $60 $30 2 $20 5 $50 3 1 $10 $30 2 1 $10 $20 0 $0 1 $10

  13. Activity - Employers and Workers • I need volunteers to be employers • Everyone else will be workers

  14. If you are an Employer… • Your goal is to make $$$ by producing T-shirts- to do that you need to hire workers • Refer to the “Output” chart in making your hiring decisions • Output scales for yellow and pink card workers are independent of each other • You start over hiring workers each round

  15. If you are an Employer… • When you hire a worker, write the wage on their card and initial it • You may not back out of a deal once it is made • Record the hire in the “Wage Paid” column of the profit calculation sheet • After each round, figure profit for that round

  16. If you are a Worker… • Your goal is to make $$$ • Earn income by finding an employer who will hire you at a mutually acceptable wage • All workers start as unskilled with different amounts of money • Jobs last for only one round and may be hired only once in a round • The worker with the most income at the end of the game wins a prize.

  17. If you are a Worker… • If you agree to work for an employer have the employer enter the wage on your card and initial it • Once a deal is made sit down - you may not back out or look for a better offer • At the end of the round you may buy an education for $25 • You must have at least $25 on your card to do so • If you do not get a job you get unemployment benefits – Yellow ($15), Pink ($35)

  18. Reminders • Employers – you are trying to make a profit. In order to do so, you must have workers to produce a product. You are competing against the other employers in the room to hire workers • Workers – you are competing against other workers for jobs and income. The employers are not your competitors.

  19. Lets Play…

  20. Lets Talk • Which worker made the most money? How? • Which employer made the most profit? How? • How many workers up-graded their skills by buying an education? Why?

  21. Lets Talk • Were all employees equally productive? • Employers, what determined how much you planned to pay workers? • What determined how much you actually paid them?

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