1. Econ 201 Essential Mathematical Tools
Economics as a Marginalist Paradigm

2. Marginal Costs What do we mean by marginal costs?
incremental, or additional, costs of producing one more unit of output
Difference in total costs of producing one more unit
Marginal cost of the 4th unit = Total Costs of the 4th unit minus the Total Costs of the 3rd unit
MC[4] = TC[4] – TC[3]

3. A Numeric Example From Alchian and Allen # Tees produced daily
Total Costs
Marginal Costs
$1.00 1
$1.90 2
$2.70 3
$3.40 4
$4.00 5
$4.70 6
$5.50 7
$6.40 8
$7.40 9
$8.60

4. A Numeric Example What Are the Marginal Costs # Tees produced daily
Total Costs
Marginal Costs
$1.00
--- 1
$1.90
$0.90 2
$2.70
$0.80 3
$3.40
$0.70 4
$4.00
$0.60 5
$4.70 6
$5.50 7
$6.40 8
$7.40 9
$8.60
$1.20

5. All of the Numbers # tees/day Total Cost Marg Cost Total Rev Marg Rev
Profit
Marg Profit
$1.00
$0.00
-$1.00 1
$1.50
$0.50
-$0.50 2
$2.70
$1.20
$2.00
-$0.70
-$0.20 3
$3.40
$0.70
$3.00
-$0.40
$0.30 4
$4.00
$0.60
$0.40 5
$4.70
$5.00 6
$5.50
$0.80
$6.00
$0.20 7
$6.40
$0.90
$7.00
$0.10 8
$7.40
$8.00 9
$8.60
$9.00

6. What Do They Mean? Total and Marginal Costs Marginal and Total
Costs increasing at
Increasing rate
Total and Marginal Costs
Marginal Costs at Minimum, TC increasing at dec rate

7. What’s It Mean to a Supplier?
Firm’s supply decision
Supply up to the point where p >= MC
Profit maximizing point
Profit Max
MR = MC

8. From the Demand Side First Law of Demand
What Does Law Of Demand Mean?
all other factors being equal, as the price of a good or service increases, consumer demand for the good will decrease and vice versa. 
Investopedia explains Law Of Demand...
summarizes the effect price changes on consumer behavior. For example, a consumer will purchase more pizzas if the price of pizza falls. The opposite is true if the price of pizza increases.

9. A Demand Example Price Qty Demanded $10.00 1 $9.00 2 $8.00 3 $7.00 4
$6.00 5
$5.00 6
$4.00 7
$3.00 8
$2.00 9
$1.00 10

10. Consumer’s Marginal Value
Some basic definitions
Total Willingness-to-pay: “value in use”
How much would you be willing to pay for x units of the good than go entirely without?
Equals the area under the demand curve up to x units
WTP for 4 units

11. Computing Marginal Value
Price
Qty Demanded
$10.00 1
$9.00 2
$8.00 3
$7.00 4
$6.00 5
$5.00 6
$4.00 7
$3.00 8
$2.00 9
$1.00 10

12. Total and Marginal Value
Price
Qty Demanded
Amt Paid
Marginal Value
Total Value
$10.00 1
$9.00 2
$18.00
$19.00
$8.00 3
$24.00
$27.00
$7.00 4
$28.00
$34.00
$6.00 5
$30.00
$40.00
$5.00 6
$45.00
$4.00 7
$49.00
$3.00 8
$52.00
$2.00 9
$54.00
$1.00 10
$55.00
Price x Qty Dem
Area under Demand
Difference in
TV(3)-TV(2)
MV is also equal
to price paid

13. In Graphic Terms Note: (again) price = marginal value
Consumer is willing to buy up to P = MV

14. What Have We Learned? How to compute marginal or incremental values
Marginal cost: the additional (change in Tot Costs) of producing one more unit
Marginal value: the value to a consumer of purchasing one more unit

15. The Bigger Lesson Sell rule for firms Buy rule for consumers
Firms will supply up to the point where the MC of producing the next unit are just equal to the price it receives for the good
First law of supply: supply curves will be upward sloping
Buy rule for consumers
Consumers will buy up to the point that price equals MV
First law of demand: demand curves are downward sloping
Negative slope  diminishing marginal value of consuming next unit