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

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)

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! 15

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. Fluffernutter Activity – relate to wages also before the last point on the slide ???

Thinking on the Margin Thinking on the Margin (3:05) Play Job Jungle after this

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…

# additional pizzas from hiring this cook? 1 Kitchen - How Many Cooks? # cooks #pizzas made # additional pizzas from hiring this cook? What happened? 1 2 3 4 5 6 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 Assume pizzas sell for $10 a piece. Then you would be willing to pay cook #4 $100. 55 10 Extra guy – helps who ever is behind 55 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

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! Tell story of cleaning barracks in the Marines. Have students complete the How Clean is Clean Enough? Handout before the last point on the slide.

Marginal Cost = Marginal Benefit Marginal Analysis How much of something should you do? Keep going until Marginal Cost = Marginal Benefit Everyone does this – even drug addicts eventually stop using and choose to sleep or eat 15

Consider the following situation. 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)

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 15

PINK CARD WORKERS 1st 5 8 2nd 14 3rd 10 19 4th 11 22 5th 12 24 6th 25 Output, Additional (Marginal) Product, and Additional (Marginal) Revenue T-shirts price (P) = $_________ $10 YELLOW CARD WORKERS PINK CARD WORKERS # Hired T-shirts Made Added Product (MP) P xMP P x MP 1st 5 8 2nd 14 3rd 10 19 4th 11 22 5th 12 24 6th 25 5 $50 8 $80 3 6 $60 $30 2 $20 5 $50 Fill in Yellow Card information together and then have students fill in Pink Card information on their own. 3 1 $10 $30 2 1 $10 $20 $0 1 $10

Activity - Employers and Workers I need volunteers to be employers Everyone else will be workers Assign enough employers so that there are 4-5 workers per employer. Have teachers act as consultants to student employers.

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

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

Round #2 – Profit Calculation Round #2 – Wages Paid Round #2 – Profit Calculation Yellow Card Pink Card # kites produced (pink+yellow) (from chart) Worker Wage Hired Paid X Price of T-shirts X $ 10 1st = $ 2nd = TOTAL REVENUE 3rd 4th — $ 5th — TOTAL COST 6th $ = PROFIT Round #2 Sub-total +Sub-total = Total cost

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.

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) Yellow card workers who do not receive a job will get $15 unemployment. Pink card workers who do not receive a job will get $35 unemployment.

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.

Lets Play… After each round give students opportunity to get an education and collect unemployment. Round 1- $10 price, Round 2- $12, Round 3 - $13, Round 4 - $8

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?

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?