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FOCUS: MARGINAL THINKING

Delve into essential economic terms like marginal cost, opportunity cost, and more. Explore the concept of marginal utility and how it influences decision-making. Learn to apply cost-benefit analysis through case studies and economic assumptions.

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FOCUS: MARGINAL THINKING

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  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 !!!!!!

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