DO NOW: p Read about A. Marginal benefits and marginal costs B. The Margin 2.Do 1.21 Applying Key Concepts 1.22 Think Fast! Mick just “Can’t get NO SATISFACTION….No UTILITY!”

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!”

IF… The expected BENEFIT is greater than the additional or MARGINAL COST… then DO IT! The additional or MARGINAL COST is greater than the expected BENEFIT… then DON’T DO IT!

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

THE GOLDEN RULE Produce or consume where MC < MB

We interrupt this class for an economic simulation game. WELCOME to Mrs. Shivers’s FLUFFERNUTTER FACTORY

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

FOCUS: The Law of Diminishing Marginal Returns OBJ.: 1.Calculate DMR with WIDGET Case Study. 2.Experience DMR by operating a FLUFFERNUTTER FACTORY!

9 1 Sunk cost =