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FOCUS: MARGINAL THINKING

Understand the concepts of marginal utility, benefits, and costs for efficient resource allocation. Explore economic assumptions, cost-benefit analysis, and sunk costs. Delve into utility and the law of diminishing marginal utility. Learn about externalities and market failures.

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FOCUS: MARGINAL THINKING

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  1. FOCUS: MARGINALTHINKING DO NOW: In your notebook, define margin marginalcost marginal benefit utility marginal utility diminishing marginal utility Mick just “Can’t get NO SATISFACTION….No UTILITY!”

  2. FOCUS: MARGINALTHINKING DO NOW: In your notebook, define margin marginalcost marginal benefit utility marginal utility diminishing marginal utility Mick just “Can’t get NO SATISFACTION….No UTILITY!”

  3. 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

  4. FOCUS: Marginal Analysis OBJ. • Define and explain key terms. • Apply key concepts. • Analyze case study. (WidgetWorks) How COST-BENEFIT ANALYSIS WORKS!

  5. Let’s Review COSTS: • Any given activity has 2 distinct kinds of COSTS • ACCOUNTING COST • OPPORTUNITY COST

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

  7. 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

  8. ECONOMIC COST: Accounting Cost +Opportunity Cost TOTAL ECONOMIC COST

  9. TRANSACTION COSTS: • Economic exchanges ALSO have TRANSACTION COST • SEARCH & INFORMATION COST • BARGAINING COST • POLICING & ENFORCEMENT COST

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

  11. 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)

  12. 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)

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

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

  15. OPTIMIZATION: • GOAL • Maximize BENEFIT • Minimize COST • Requires OPTIMAL (most efficient) ALLOCATION of resources • Examines TRADE-OFFS

  16. 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!”

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

  18. 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

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

  20. 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

  21. highlighter 1. Expresso 2. Expresso 3. Ice Cream

  22. 11 10 9 8 7 6 4 1 -1 9 149 Sunk cost 7 5 2 -2 2 -1 3 1

  23. Costs or Benefits which Occur to Those NOT Party to a Transaction: 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) EXAMPLES OF MARKET FAILURE!

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