Thinking and working like an economist Today: Marginal benefit Marginal cost Graphing

First: Crashers If you did not sign the “crash” list on Monday, you are not able to add this Econ 1 lecture If you were here Monday and have not let me know that you are here, please do so now

Why am I taking Econ 1? Hopefully, you have an interest in economics If not, I hope to teach you something that you will find important to your life later on Lessons learned in this class could help you make good decisions later on Good decisions are usually correlated with more money

Who is in the light blue shirt? (Come to class to find out)

Poker and economics Opportunity cost Don’t ask “what will make me money?” Ask “what will make me the most money?” For poker players, you can read more about opportunity cost at Game theory Understanding your opponents can give you a big edge in life

Last time… Introduction to the 7 core principles of economics Scarcity Cost-benefit analysis Incentives matter Comparative advantage Increasing opportunity cost Equilibrium Efficiency

Today: Begin Unit 1 Basics of supply and demand Why is economics important? A few tools necessary to be a good economist Thinking like an economist Marginal benefit Marginal cost Working with graphs

Thinking like an economist Examples Surfing Health insurance Driving to work Find fastest way to work Sugar prices in the U.S. See F/B

How to successfully think like an economist Come to lecture Read the text Think, think, think Try to understand the “Economic Naturalist” problems Ask questions in lecture, section, and office hours Understand what is going on before moving to the next topic

Why is economics important to study? Study people’s and firms’ choices Theorize general tendencies of behavior Find ways to increase efficiency of the economy If there are more goods and services available, then there is “more of the pie” to go around

What is fair? Economists generally do not study this, since it is difficult to determine what is “fair” Instead, when possible, economists often try to find situations in which some people can be made better off without hurting others These situations are called Pareto improvements

Potential Pareto improvements International trade Removal of complaints from overbooked flights Replacing pollution controls with marketable permits (advanced idea) Improving property rights

What are some things that economists study? Individual markets (microeconomics) An economy as a whole (macroeconomics) This class addresses microeconomic issues Individual topics include: Highway congestion Marriage markets Education The environment Labor markets Health International trade

Marginal analysis One of the most important ideas in economics When you hear “marginal,” think “one additional unit” Example: F/B describe marginal benefit as “the increase in total benefit that results from carrying out one additional unit of an activity” (p. 12)

Marginal analysis An example You have $10 available to buy energy drinks today Each energy drink costs you $2 Any money left over can be used to buy other items Should you buy 5 energy drinks today?

Solution Buy an additional energy drink if Marginal Benefit (MB) exceeds Marginal Cost (MC) If MB = MC, you are indifferent about buying an additional energy drink If MB < MC, you will not buy an additional energy drink

Your benefit schedule

What should we do? We should buy the third energy drink since MB > MC (2.5 > 2) We should not buy the fourth energy drink since MB < MC (1.5 < 2) Note that we are NOT maximizing average benefit or total benefit

Surplus Economics surplus is benefit minus cost Marginal surplus 1 st unit: 5 – 2 = 3 2 nd unit: 3 – 2 = 1 3 rd unit: 2.5 – 2 =.5 Total surplus for consuming 3 units: $4.50

Thinking like an economist: MB/MC and grades Your choices over the next 10 weeks will help determine the grade you get in this class “Should I choose to spend a lot of time studying and try to get a good grade?” “Should I choose to sleep in and miss lecture?” Choices like these will help determine your grade

Working with graphs

Some reminders of graphs Label axes Label curves Label dollar amounts, quantities, etc., when needed

Working with graphs: Slope Supply: Slope is rise (red line) divided run (green line), or 6 divided by 4, which is 1.5 here

Working with graphs: Equations of lines Demand: y = mx + b m is slope (-1) b is y-int. (10) y = -x + 10