DO NOW: p. 17DO NOW: p. 17DO NOW: p. 17DO NOW: p. 17

1.1. Read aboutRead aboutA. Marginal benefits and marginal

costsB. The Margin

2.2. Do Do 1.21 Applying Key Concepts1.22 Think Fast!

Mick just “Can’t get NO SATISFACTION….No UTILITY!”

FOCUS: MARGINALFOCUS: MARGINALTHINKINGTHINKING

FOCUS: MARGINALFOCUS: MARGINALTHINKINGTHINKING

You may want to card these terms:You may want to card these terms:economic costeconomic cost marginmarginaccounting costaccounting cost marginalmarginal costcostopportunity costopportunity cost marginal benefitmarginal benefit

explicit/ implicit costsexplicit/ implicit costs utilityutilitytransaction coststransaction costs marginal utilitymarginal utility

search & info costssearch & info costs diminishing marginal utilitydiminishing marginal utility bargaining costsbargaining costs policing & enforcement costspolicing & enforcement costs

Mick just “Can’t get NO SATISFACTION….No UTILITY!”

FOCUS: Marginal Analysis

OBJ.1. Define and explain key terms.2. Apply key concepts.3. Analyze case study. (Widget Works)4. Experience! (Fluffernutter Factory)

How COST-BENEFIT ANALYSIS WORKS!

REVIEW –KINDS OF COSTS:

• Any given activity has 2 distinct kinds of COSTS– ACCOUNTING COST– OPPORTUNITY COST

ACCOUNTING COST:

• A simple MONETARY COST of a good or service $$$$$$$$$$$

• An “OUT-OF-POCKET” expense• An EXPLICIT COST• A DIRECT COST

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

ECONOMIC COST:Accounting Cost+Opportunity Cost TOTAL ECONOMIC COST

Explicit Cost (DIRECT)+Implicit Cost (Indirect) TOTAL ECONOMIC COST

….BUT

Economic exchanges ALSO have other kinds of costs,

like, for instance…

•TRANSACTION COSTS– SEARCH & INFORMATION COST– BARGAINING COST– POLICING & ENFORCEMENT COST

SEARCH & INFORMATION COST:

• Time spent to determine– if desired good is available– best price (comparative shopping)

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)

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)

REVIEW: 4 Key Economic Assumptions

• People are RATIONAL.• People are GREEDY (wants =

unlimited).• People act in their own SELF-

INTEREST.• RESOURCES are SCARCE.

COST-BENEFIT ANALYSIS:

• Making a list of the PROS & CONS of a decision

• Weighing the COSTS against the BENEFITS

OPTIMIZATION:

• GOAL– Maximize BENEFIT– Minimize COST

• Requires OPTIMAL (most efficient) ALLOCATION (dividing up for use) of resources

• Examines TRADE-OFFS

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?

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!”

IF…• The expected BENEFIT is greater than the

additional or MARGINAL COST…then DO IT!

• The additional or MARGINAL COST is greater than the expected BENEFIT…

then DON’T DO IT!

UTILITY & SUPPLY and DEMAND:

• DEMAND SIDE – the “buy” side” Law of Diminishing Marginal Utility

• SUPPLY SIDE – the “sell side” Law of Diminishing Marginal

Returns

THE GOLDEN RULE• Produce or consume where

MC < MB

We interrupt this class for an economic simulation

game.

•WELCOME to Mrs. Shivers’s

FLUFFERNUTTER FACTORY

FOCUS: Utility and the Law of Diminishing Marginal

UtilityOBJ:1. Define key terms.

utility, marginal utility, diminishing marginal utility, “util”

2. Analyze case studies.

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

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

highlighter

2. Expresso 3. Ice Cream 1. Expresso

#1 #2

#6

#4

#5

#3

FOCUS: The Law of Diminishing Marginal Returns• OBJ.:

1.Calculate DMR with WIDGET Case Study.

2.Experience DMR by operating a FLUFFERNUTTER FACTORY!

9

1

Sunk cost

3

149

11 10 9 8 7 6 5 3 1 -1

140 + 9 =

7 5 2 -2

2-2