1. The Last Word: Ch1 Review due next Tues
FrontPage: NNIGN
The Last Word: Ch1 Review due next Tues
Ch 1 quiz next Tues

2. Economics Chapter 1, Section 2
Marginal Utility
…Or, how many jalapenos on your nachos?

3. Basic ideas to start So ,we talked about costs and benefits last time…
Another way to analyze the cost of something is to look at what adding just one more “something” will do
Is it wise to keep adding or to continue doing something, or at what point should we stop?
Key words:
Utility - The satisfaction one receives from the consumption of a good or service.
Margin, Marginal – an additional unit of something
Economists are often concerned with the effect of adding something “at the margin”, or the “marginal cost” of something
Margins are the “edge” of something (paper); we are pushing out the “edges” to see what happens

4. Of Marshmallows and Mints
On your chart, keep track of how our test subjects feel about eating each…

5. Think about a hit song that you liked from 5 years ago…
How did you feel the first time you heard it?
Did you have to hear it a couple times to really start to like it a lot?
How did you feel about it after hearing it 1000 times?

6. From an individual to a business…
We’ve seen how the benefit of eating one more marshmallow (or mint) does not always increase, but actually decreases after a certain time
This is based on the law of diminishing marginal utility..we’ll come back to it later
How does this impact the choices that businesses make, such as hiring employees, for example?

7. Marginal Product (diff between last and next product)
The Paper Factory
Land – the “factory floor”
Remains fixed in size
Capital – the scissors (2), paper and staplers (1)
Remains fixed in number
Labor – you
How does productivity change as we add more workers?
Keep track on your chart…
# of workers
Total Product
Marginal Product (diff between last and next product)
Benefit? 1 - 2 3 4 5 6 7
Factory Rules:
One sheet at a time per person
Must be cut by scissors - lengthwise
Longest chain counts; only one chain is counted.

9. Marginal Costs and Benefits
Marginal cost – the cost of adding one more unit of something
Marginal benefit – the benefit of adding one more unit of something
Principle: As long as the marginal benefit of an activity exceeds the marginal cost, people are better off doing more of it.
When the marginal cost exceeds the marginal benefit, they are actually better off doing less of it.

10. Airlines and Marginal cost activity

11. The Last Word: Ch1 Review due next Tues
FrontPage: NNIGN
The Last Word: Ch1 Review due next Tues
Ch 1 quiz next Tues

12. Airlines and Marginal cost
As senior executives at America West Airlines, you and your group are responsible for setting fares for the many flights your airline runs each day.
To fly a 200 seat plane from Phoenix to Boston costs approximately $80,000. This includes fuel, crew salaries, on-board amenities, insurance, etc.
What defines a “unit” (of sale) in this example?
What is the average cost of each “unit” to America West?
For what price would you sell seats on this flight?
Would you ever sell a seat for less than that?

13. Airlines and Marginal cost
Now imagine there is a man standing at the gate who is willing to pay $200 for a seat on this flight. (Assume the plane is not fully sold.)
What is the marginal cost of taking this passenger on?
What is the marginal benefit of taking this passenger on?
Should you sell him the ticket?

14. Marginal Analysis
An analysis of the cost/benefit of adding one more unit of something
Similar to the idea of “cost/benefit” analysis…
Marginal analysis helps people to make more informed decisions.
Those who do not use marginal analysis are likely to reduce the total benefits available from the choices made.
In the whole economy, a lack of marginal decision making reduces income and growth.
It is helpful when making a decision (as an individual or a business) to do a marginal analysis of any situation to see what doing just one more of something will give you…
Additional benefit, or just more cost?