1. Marginal Analysis AP Micro
Do you think like an economist? Anything worth doing is not necessarily worth doing well

2. Whose wisdom best fits today’s world?
Always take the short cut; and that is the rational one. Therefore say and do everything according to soundest reason.
Meditations iv.51
Marcus Aurelius , A.D. 120 to 181
Whatever is worth doing at all is worth doing well.
Philip Dormer Stanhope
Earl of Chesterfield, 1694 to 1773

3. Should you do all you can to earn a perfect grade of 100 on your next economics exam?

4. Until the Last Unit Equals…

5. Directions Please read Introduction to MARGINAL ANALYSIS
Identify definitions for
Marginal analysis
Marginal cost
Marginal benefit
Write your own example of a choice you made “at the margin.”
How about an example of a business decision made at the margin? Government?

7. Homework? Really?

8. # of Hires
Total Benefits (TB)
Marginal Benefits (MB)
Marginal Cost (MC)
MB - MC 1
$100 2
$200 3
$270 4
$330 5
$382 6
$420 7
$450 8
$460 9 10
$455
-$5
$50
-$55

10. Marginal Decision Rule MC = MB
Continue choosing until the marginal costs are equal to or greater than the marginal benefits.

11. ESL Vocabulary Marginal utility Diminishing marginal utility
additional satisfaction
Diminishing marginal utility
in a given time period, consumers generally receive less satisfaction from additional (marginal) units of a good consumed
The more you consume of something, the less you value one additional unit of it!

12. How Clean is Clean Enough?

13. Environmental Statements
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 no 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. It may be too costly to clean the lake completely. Resources are scarce. If the County Council overspends for the environment, it can accomplish less in other areas that are important, too.

14. Discussion Questions
Identify the marginal benefits and marginal costs in this activity.
What is the opportunity cost?
Since the marginal benefits decreased, might there be a time when the MC of cleaning were greater than the MB?

15. Dollar-Auction Experiment
You are about to participate in an ascending-price, oral auction for a one-dollar bill. The person with the highest bid will win the dollar and pay the amount of his/her final bid. Only the highest bidder receives the dollar. The opening bid starts at 25 cents and all bids from there must be given in minimum 5-cent increments. When all the bidding stops, the auctioneer will give the dollar bill to the highest bidder for the amount bid. The person with the second-highest bid will pay the auctioneer his/her highest bid but will not receive the dollar.

16. Post Auction Discussion
Explain the logic in making a bid over $1
Do not Bid Up
Do Bid Up
Costs
$0.95
$0.10
Total
MC of X
$1.05

17. Sunk Cost There’s no use crying over spilled milk!
Costs that have been incurred that can’t be recovered
A rational maximizer does not let sunk costs influence one's decisions….
THE ONLY IMPORTANT COSTS ARE THE ONES IN THE FUTURE!

22. Diamonds Example Couple shopping for diamonds: Which to choose?
No diamond $0
¼ carat diamond $1,000
½ carat diamond $1,500
¾ carat diamond $2,250
10 carat diamond $220,000
Which to choose?
Evaluate marginal benefit to marginal cost
Can there be too much of a good thing?

23. A Final Question
Use the economic perspective to explain why someone who is normally a light eater at a standard restaurant may become somewhat of a glutton at a buffet-style restaurant that charges a single price for all you can eat.