T5, T6, T7

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Do Now

Identify which of the ³8 Ways´ helps you to answer the following (youdo not have to actually answer the question itself):

1. The US has a trade deficit with China. Should we stop allinternational trade between our two nations?

2. GM is planning on building a factory in Gary, IN to make newCamaros. How many Camaros should they produce in thisfactory?

3. More and more people seem to be buying hybrid cars nowadays.Will that fact cause the price to go up or down?

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Agenda

1. Discuss Do Now (5 minutes)

2. Homework Review (5 minutes)

3. OBJ T5 (20 minutes)


5. Birka (20 minutes)


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T5 ± Define cost, opportunity cost, andbenefit.

We have thrown around terms so far such as ³cost´ and³benefit´. These are common words and their meaning ispretty clear. However, they have certain definitions ineconomics that help answer problems.

For instance, there are subtle differences between costand opportunity cost that economists are very particular about.

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Opportunity Cost: the cost of a choice that is ³passedover´ to make another choice.

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Scarcity means you have to make a choice between A andB. You can¶t have both.

Therefore, if you choose A, you don¶t get B. You had an

opportunity to choose B, but you didn¶t.

Therefore, the opportunity cost of A is B.

Notice, this is not cost in the sense that we normally think

about it in life. You are not paying for anything ³extra´.

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Example 1:

You have $15. You can either buy a CD or a t-shirt. The CDcosts $15. The t-shirt costs $15. You choose the CD.

Therefore, the opportunity cost of 1 CD is 1 t-shirt.

=

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Example 2:

You have $25. A video game is $50. A soccer ball is $25. You choose the video game. Therefore, the opportunity

cost of 1 video game is 2 soccer balls.

=

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Example 3:

You have $25. A video game is $50. A soccer ball is $25. You choose the soccer ball. Therefore, the opportunity

cost of 1 soccer ball is ½ a video game.

=

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Example 4:

You have 1 hour of free time. Your homework will take anhour. A round of CoD will take 30 minutes. You choose to

do your homework because you aren¶t lazy. Theopportunity cost of your doing your homework is 2rounds at CoD and«what else?

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Cost: the total ³sacrifice´ of involved in performing anactivity or obtaining a good or service.

This sacrifice includes more than just money (accounting

cost). It includes foregone time and resources.

Cost = Accounting Cost + Opportunity Cost

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Benefit: the value (either monetary or utility) you get frommaking a choice. It is considered to be the opposite of cost.

Note: Utility is ³enjoyment´ or ³satisfaction´ you get froma choice. We will get to utility theory later!

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Summarize!

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T6 ± Explain the concept of marginalism.

Looking at the ³8 Ways´ we mentioned marginalism. Itmeant ³one unit of change´ or ³the change that happensat the edge´.

Example Questions:What does it cost when I make one more unit of shoes?What do I get when I buy one more unit of video games?Does it benefit me to get one more unit of A and one lessof B? Does it cost me?

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Notice we are not examining the total. In really complexsituations this is not feasible. It would take forever.Therefore, we examine each individual choice we have tomake.

If each choice is a good one, then we make it, andtheoretically our overall total should be better for it.

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Example Situation: You collect rare coins. You have hundreds of them, andyou want your collection to be the best in Chicago.Someone offers you a 1949 misprint dime, but they want a

1931 all-copper penny from your collection as a trade.

When making this decision, you consider the value of thatsingle dime and decide if it is worth more to you than thepenny. If so, you make the trade and your collection is

worth more.

You do NOT need to total the value of your entire

collection to make the decision.

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To demonstrate this principle, we are going to play Birka!

Here are the basics:1. You get into a group of 4 (or 3). Everyone gets 13

cards.2. The only thing that matters in this game is the suit (not

the number/face value of the card).3. Your goal is to make trades, one at a time, to make

your hand the most valuable at the end of the game.

4. Each person makes a trade 2 times, and then the gameis over (twice around the circle).

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Premise: You are Vikings returning from pillaging anearby town. You bring back iron spades, heart shapedamulets, sparkling diamonds, and wooden clubs.

Rules:1. The first of every item is worth the most. Every item

after that adds value, but less. (See the scoring sheet.)2. During a ³buy´, you propose a trade. (You put out a

spade and ask for a club, for instance.)

3. If someone wants to make that trade, they put therequested card on the table and the deal is done.

4. If no one wants the trade, the buyer can either withdraw the trade or add another card to ³sweetenthe deal.´

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Rules (con¶t):5. Play continues to the left until all 4 players have made

2 trades (or trade proposals) each. This means twicearound the table.

6. Make sure to count the value of the table before andafter the game to compare later on.

7. The winner is the person with the highest valued handaccording to the scoresheet.

8. NO FIGHTING over whose card was down first.

Demerits for fighting. You aren¶t real Vikings. It¶s agame.

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Sample Game:

S outh is the first to

serve as buyer. S hehas a 6-4-2-2 hand (6

spades, 4 diamonds, 2

hearts, and 2 clubs)

which is worth 961

points. S he wants totrade a spade for a club

or heart.

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Sample Game:

S outh says, "I want a

club." S he then bids aspade by putting it in

the middle of the table.

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Sample Game:

W est quickly accepts

the trade by throwing

the requested club onthe spade. W est gives

up a fourth club (worth

10 points) but gains a

third spade (worth 25

points). S outh gives upa sixth spade (worth 4

points) but gains a third

club (worth 25 points).

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Sample Game:

T he role of buyer

rotates to W est, who

has a strong 4-4-3-3hand.

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Sample Game:

W est says "I want a

club and a spade" and

bids a heart by putting it in the middle of the

table. None of the other

players would benefit

from the trade, so

nobody accepts thebid. W est withdraws his

bid and the role of

buyer moves to North.

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Sample Game:

North would benefit by

trading a fifth spade

(worth 7 points) for athird heart (worth 25

points).

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Sample Game:

S o North says "I want a

heart" and bids a spade

by putting it in themiddle of the

table. East would

benefit from the trade

since he would give up

a sixth heart (worth 4 points) and gain a

fourth spade (worth 10

points).

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Sample Game:

But East doesn't accept

the bid, gambling that

North will sweeten it with another card. W hen

nobody accepts the

spade bid, North adds a

diamond to it.

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Sample Game:

East quickly responds

by slapping a heart on

the bid. Notice that W est also would have

benefited from the

trade, but he responded

too slowly.

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Sample Game:

It's East's turn to serve

as buyer. He

desperately needs aclub since he's short in

that suit.

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Sample Game:

East says "I want a

club," and bids a

heart. None of theothers respond to the

bid.

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Sample Game:

East therefore adds a

diamond to his

bid.S

outh would benefit slightly from the

trade, but doesn't

respond in hopes that

East will add another

card to his bid.

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Sample Game:

East adds another heart to

the bid and S outh accepts

the trade by putting a club

on top of the cards. East gained a second club (worth

70) but gave up a fourth and

fifth heart (worth 10 and 7

points) and a fifth diamond

(worth 7 points). S outh gave

up a third club (worth 25

points) but gained a third

and fourth heart (worth 25

and 10 points) and a fifth

diamond (worth 7 points).

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Sample Game:

T he role of buyer now goes

back to S outh, who will try to

trade away a spade and a

diamond for a club. None of the other players gain from

the trade, so it's

rejected. W est, North, and

East will also fail in their

attempts to trade. After East

passes, the hand is over.

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Sample Game:

S outh has a 5-5-4-2 hand, worth 999 points. W est has a 4-4-3-3

hand, worth 1,000. North has a 4-3-3-3 hand, worth 990 points,

and East has a 4-4-3-2 hand, worth 975. T he total value of the four

hands after trade is 999 + 1,000 + 990 + 975 = 3964. Recall that before trading began, S outh had a 6-4-2-2 hand worth 961, W est

had a 4-4-4-2 hand worth 985, North had a 5-4-3-2 hand worth 982,

and East had a 6-4-3-1 hand worth 916. T he total value of the

hands before trade was therefore 961 + 985 + 982 + 916 = 3844. By

trading, the Vikings increased their wealth by 3964 - 3844 = 120.

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While you are playing, consider:

How does this demonstrate marginalism?

What situations can you think of in life thatdemonstrate principles similar to this?

Why do you think value is added from the beginning toend of the game?

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Summarize!

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T7 ± Define marginal cost and marginal benefit.

Marginal Cost: how much it costs you to add one moreunit. (= total cost after adding 1 unit)

Marginal Benefit: how much it benefits you to add onemore unit. (= total benefit after adding 1 unit)

How is marginal cost and benefit demonstrated in Birka?

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T7 ± Define marginal cost and marginal benefit.

Summarize!

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Business Calculus

T5, T6, T7

Documents

Transcript of T5, T6, T7