FOCUS: MARGINAL THINKING You may want to card these terms: economic costmargin accounting costmarginal cost opportunity costmarginal benefit explicit/ implicit costsutility explicit/ implicit costsutility transaction costsmarginal utility search & info costsdiminishing marginal utility search & info costsdiminishing marginal utility bargaining costs bargaining costs policing & enforcement costs policing & 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 the TIME 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!”

UTILITY & SUPPLY and DEMAND: DEMAND SIDE – the “buy” side” Law of Diminishing Marginal Utility SUPPLY SIDE – the “sell side” Law of Diminishing Marginal Returns

FOCUS: Utility and the Law of Diminishing Marginal Utility OBJ: 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. Expresso3. Ice Cream1. Expresso #1 #2 #6 #4 #5 #3

9 1 Sunk cost =

FOCUS: EXTERNALITIES An EXTERNALITY is a COST or a BENEFIT that affects a third party not involved in a transaction TYPES: –POSITIVE (ex.: smelling my neighbor’s roses) –NEGATIVE (ex.: pollution) COPY INTO YOUR NOTES NOW !!!!!!