Marginal Analysis. Vocabulary Marginal= one more unit of something Marginal Analysis= a type of decision making that compares the extra benefits to the.

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Presentation transcript:

Marginal Analysis

Vocabulary Marginal= one more unit of something Marginal Analysis= a type of decision making that compares the extra benefits to the extra costs of an action

Fluffernutter Production How did specialization and division of labor affected total output? Column Three: Why did marginal output eventually decrease?

Law of Diminishing Marginal Returns When more and more units of a variable resource such as labor are added to a fixed resource such as capital, eventually the additional (marginal) output associated with the variable resource declines The law of diminishing marginal returns is observed in production processes when at least one resource is fixed- that is can’t change during the time period in question

How does diminishing marginal returns relate to the number of workers a firm will hire?

Diminishing Marginal Value In a given time period, consumers generally receive less satisfaction from additional (marginal) units of goods consumed In other words, the more you consume of something, the less you value one additional unit

Evaluate this statement: You CAN have too much of a good thing

Environmental Statements Statement 1: Local lake is a disaster. It was once a beautiful, clean lake where you could drink the water safely. Now it is dirty from overuse, soil runoff and overflow from septic tanks. The County Council should clean the lake completely: 100% clean. The technology and know-how are available. There is not excuse for not doing the job completely.

Statement #2: We can clean up most of the pollution in the lake for one-third of what it would cost to make it completely clean. Resources are scarce. In the County Council overspends for the environment, in can accomplish less in other areas that are important, too.

What should we do with the money?

What will it take to completely clean the rug?

Continuing to clean the rug/lake means resources will be to be allocated from the other uses we listed. What is the opportunity cost of cleaning the environment in terms of what they must give up?

The Economic Way of Thinkng If the marginal (additional) benefit of an action is greater than the marginal (additional) cost, DO IT! If the marginal cost of an action is greater than the marginal benefit, DON’T DO IT!

Given that the marginal benefit ( the amount of trash collected) decreased with each round, might there come a time when the marginal costs of cleaning the rug (or environment) were greater than the marginal benefits? In the extreme, what if the last bit of pollution in the lake were doing very little harm and it would be very, very expensive to locate and remove it? Could the money be better spent to improve schools or provide more police protection?