Warm-Up It’s been a long time since you were last in economics, but I bet you still used some economic thinking… Tell me about how you demonstrated some economic thinking over the weekend. Be sure to explain both the CONCEPT and the EXAMPLE in detail. (If you write less than a full paragraph, it’s probably not explained enough.) Some concepts you might want to consider… Scarcity Choice Utility Trade-offs Opportunity cost Incentives Any of the four factors of production…

Before we start…an experiment Volunteers? Rules Eat marshmallows one at a time Record how happy/satisfied you are after EACH marshmallow (how much utility that marshmallow brings you) Must eat continuously (no unreasonable pauses) Do not drink water during the experiment You can stop eating whenever you want No sharing of marshmallows Once you stop eating, you’re done – no starting again later

Or: Economics at lunch

Before we start… The lead singer of the Clash has a problem: Should I stay or should I go now? If I stay there will be trouble And if I stay it will be double So come on and let me know How does he make his choice? Link

Guiding Questions So far, we’ve thought a lot about making choices to use our scarce resources most efficiently, and how to compare costs and benefits to make those choices. But, our choices aren’t always all-or-nothing decisions, like “Freddy’s or Subway for lunch?” Sometimes our choices are, “how many fries should I eat for lunch?” What is marginal analysis, and how do we use it? How do producers use marginal analysis to run their businesses?

Marginal Thinking – A definition Marginal thinking is used for deciding how much of something you will do or how many of something you want

Definitions Marginal benefit = the benefit (utility) you receive from consuming one more unit of something

Marginal analysis charts look like this…. Units (pieces of marshmallow, hours of work, slices of pizza) Marginal Benefits Total Benefit 1 2 Etc.

Let’s check in with our contestants… Volunteers: How many marshmallows did you eat? Why did you stop eating? What would have happened if you ate one more? What was the scarce resource in this example?

More Definitions… Marginal cost = the cost you receive from one more unit of something Law of diminishing marginal utility = A consumer eventually reaches the point where he/she receives less satisfaction from each additional (marginal) unit of a good consumed In other words: the more you consume of something, the less you value one additional unit of it

Too Many Cooks in the Kitchen? You’re opening a new restaurant, and you’re trying to decide how many kitchen staff to hire. Obviously, more is better – right? But you’ve also heard the phrase “too many cooks in the kitchen,” and want to perform some marginal analysis to discover the ideal number of kitchen staff you should hire. Each new hire costs $10/hour. The marginal benefit of each new staff member is on the next slide…

Units Marginal Benefits Total Benefit Marginal Cost 1$50$50$10 2$30$80$10 3$20$100$10 4$10$110$10 5$5$115$10 6–$5$110$10

Let’s come back to the Clash… The lead singer of the Clash has a problem: Should I stay or should I go now? If I stay there will be trouble And if I stay it will be double So come on and let me know How does he make his choice? A: He should stay, as long as his marginal benefits outweigh his marginal costs. If his marginal costs outweigh his benefits, he should go!

How do producers actually use marginal analysis…? The production possibility curve allows us to compare the marginal costs and benefits between 2 production options. The PPC is a graph that shows all the various combinations that can be produced when ALL resources are used most efficiently, given a current level of technology. Let’s work with an example…

Laurasians You live in Laurasia. Like most Laurasians, you like to eat pizzas and decorate with fine rugs. The more pizzas and rugs you can get, the happier you are. Unfortunately, making these goods takes time, and you only have six hours per day for production. In one hour you are able to make four pizzas OR two rugs, but not both. Cut out your production cards now.

Production Possibilities Curve for Laurasians

To sum up… Rational economic thinking is made at the margin, comparing the costs and benefits The Production Possibilities Curve shows the trade- offs between the production of two goods The PPC demonstrates scarcity, choice, trade-offs, and marginal thinking… basically everything we’ve talked about! Vocab: Marginal benefit Marginal cost Diminishing marginal utility Production possibilities curve