1. Lesson 1.6 Marginal Cost and Benefit SSEF2 B. EXPLAIN THAT RATIONAL DECISIONS OCCUR WHEN THE MARGINAL BENEFITS OF AN ACTION EQUAL OR EXCEED THE MARGINAL COSTS. SSEF6 A. DEFINE PRODUCTIVITY AS THE RELATIONSHIP OF INPUTS TO OUTPUTS.

2. Lets begin with a short story  Imagine a hungry woman standing underneath a tree filled with ripe peaches. It makes sense to reach up, grab a nearby peach, and eat it. The cost (in this case, the energy required ti reach out and pluck the fruit) is small, and the benefit (reducing hunger) is high.  After the first peach, the woman reaches up and takes another peach. This time the peach is a little farther away, so the cost is a bit higher. Also, she’s not as hungry as she was before, so the benefit of eating the second peach isn’t as great as the first.  Now imagine the woman has eaten five peaches. The sixth peach is high up in the tree (high cost), and the woman is feeling pretty full (low benefit), so she decides to stop eating peaches. For her the marginal cost – the cost of procuring one more item, outweighs the marginal benefit – the benefit associated with that one additional item. Therefore, the woman makes a rational economic decision to stop at five peaches.

3. And some more vocab  Marginal cost – the cost of procuring one more item  Marginal benefit - the benefit associated with that one additional item  Fixed cost - a cost that stays the same despite the level of output  Variable cost – a cost that varies with the level of output  Total cost – the combination of variable and fixed costs

4. Marginal revenue(benefit) vs Marginal cost

5. Lets look at this table… Quantities Produced Fixed Cost Variable Cost Total Cost 0505 151015 251318 351520 451621 551823 652530 753641

6. So take a moment and fill in the table Quantities Produced Fixed Cost Variable Cost Total Cost Cost to Produce One Additional Item 0505 151015 251318 351520 451621 551823 652530 753641

7. Did your table match? Quantities Produced Fixed Cost Variable Cost Total Cost Marginal Cost 0505 15101510 2513183 3515202 4516211 5518232 6525307 75364111

8. Marginal Cost  Marginal cost is the increase in a producer’s total cost when it increases its output by one unit

9. Now…for per unit costs

10. Law of diminishing marginal returns  As you add variable resources to fixed resources the additional output will eventually decrease

11. Ok….deep breath…now it gets a bit tough  The law of diminishing returns  Do paper chain factory simulation

12. Diminishing marginal returns

13. Revenue  Total Revenue: the overall measure of a company’s income, including its sales, for a given period of time. This number is not the same as profits or earning of the company; however, total revenue is part of the calculation of profit.  Marginal Revenue (MR) is the derivative of Total Revenue (TR) with respect to the Quantity of output; simplified, MR is the revenue associated with one additional unit of production.

14. Lets graph

15. Law of diminishing marginal return explained…