Transcript Marginal Cost

THE STUDY OF INDIVIDUAL CHOICES CONCERNING THE
USE OF RESOURCES AMONG COMPETING WANTS TO
MAXIMIZE WEALTH
Scarcity
 All resources are limited
 So, people cannot obtain all that they want
 they must make a sacrifice
 or in more economic terms, “Pay a Cost”
 Scarcity forces YOU to choose among alternatives
Resources – What are they?
Land
Human capital (Labor)
Physical capital
Entrepreneurship
Economics – a way of analyzing
choices concerning use of resources
 Ultimate Goal of Economics: Maximize individual and
societal wealth
 Wealth is the subjective evaluation of well being
 Economic thinking can be used to maximize your own individual
wealth.
 Economics can be used for social policy to maximize wealth for all
members of a society.
Here’s the Deal
Resources are insufficient to satisfy our
unlimited wants.
“We can’t have everything we want.”
We must make choices – inevitable reality
Choices require decisions between
alternatives
Alternatives create winners and losers
So we should be careful about the choices
we make.
Benefit/Cost Analysis
State the goal and identify the resources
available to reach the goal.
Identify alternative ways to use the resources to
achieve the goal.
Narrow the alternatives to two. Evaluate the
advantages and disadvantages of each
alternative.
Select the best choice, based on available
information
The choice not selected is called the opportunity
cost.
Keep in mind
The choice is the alternative selected.
The opportunity cost is the alternative not
selected, the opportunity given up.
Every choice has a cost; there is no such
choice as a free choice.
DISADVANTAGES ARE NOT COSTS.
There is only one cost to each choice.
Marginal
A little more or a little less. Compare benefits
and cost of two alternatives
The Solution: Marginal Analysis
 Every resource use has a benefit and an
opportunity cost.
 We should only use the resource in that activity if
the benefit outweighs the OC.
 Marginal analysis tells us how much of each
resource to use in each activity.
Using Marginal Benefit/
Marginal Opportunity Cost Analysis
Investigating two alternatives
What’s the difference in benefits between
the two?
Is the marginal benefit of the choice
greater than the marginal OC?
The Marginal Principle
 How far should I pursue any single activity,
knowing that the resources I am using have
opportunity costs; they could be doing other
things? Ex. You can’t please everyone
 If the marginal benefit is greater than the marginal
opportunity cost, go for it; otherwise, go back!
Using Marginal Analysis
 How long should I wait in the lunch line?
 As long as the marginal (additional) benefit of getting hot lunch
outweighs or is MORE than the marginal cost of time lost with
friends.
 As long as MB (Marginal Benefit) is > MC (Marginal Cost)
 How long should I continue dating my boyfriend?
 As long as the marginal (additional) benefit of seeing him is
greater than the marginal (additional) cost of seeing better
guys.
 MB > MC
 How long should I study for the unit test?
 As long as the marginal (additional) benefit of studying is
MORE than the marginal cost of no sleep.
 MB > MC
Opportunity Cost
Use opportunity cost to explain the following

Why farmers often wait until a rainy day
to do errands in town, while a
businessman in a new suit will decide to
forego his errands on the same day.

The opportunity cost (OC) for a farmer
doing errands in town on a rainy day is
lower than the OC for a businessman
doing errands in town on the same day
Why businessmen often buy full-fare
tickets while people planning vacations fly
when rates are lower
The opportunity cost for a businessman
buying full-fare tickets is higher than that of
a family planning a vacation
Why movie stars, fashion models and rocksingers have higher divorce rates than the rest of
the American population
The opportunity cost for a rock star getting
divorced are lower than the opportunity cost are
for the rest of the American population to get
divorced
Law of Diminishing Returns
Output will ultimately increase by progressively
smaller amounts when the use of a variable
input increases while other inputs are held
constant
*The point at which spending more time will
result in lesser return
Example
 Ms. Joy decides to start a zucchini garden
 Year 1 she harvests 20 zucchini!
 Year 2 she uses 1 pound of fertilizer  which results in 30 zucchini!!
 Year 3 she uses 2 pounds of fertilizer  35 zucchini
 Year 4 she uses 3 pounds of fertilizer  37 zucchini
 Year 5 she uses 4 pounds of fertilizer 33 zucchini – less than
before…hmmmmmm
 Year 6 she uses 5 pounds of fertilizer  5 zucchini…all the rest were
killed before flowering 
The Principle of
Exchange
People will exchange if they gain more than they
give; if the value of the choice is greater than the
opportunity cost.
How do we get what we want?
Scarcity causes goods and services to be
rationed
How do we do this?
Who decides on the mechanism?
Rationing Methods
First-Come, First-Served
Merit or Need
Arbitrary - Age, Hair Color, Shoe Size
Price--a Market System
Advantages of a Price System
Anonymous - Participants may not know each
other’s characteristics
Market provides variety
Compare relative prices (i.e., opportunity cost)
Common Currency - No question of value
Individual choice to participate
The Market
One way to allocate scarce goods and services
Relative prices: why?
$50,000
$5
Because Scarcity Exists:
Scarce goods have to be rationed.
Some folks will be told “NO!!!”
It’s not fair, everyone will not be happy.
Price: unit by which we measure
relative scarcity
Order these products in terms of
relative scarcity
 a candy bar
 a yacht
 a Toyota mini truck
 a nice dinner for two in LA
 a ticket to a professional baseball game
 dinner for one at MacDonald’s
 a laptop computer
Order these products in terms of
relative scarcity
7 a candy bar
1 a yacht
2 a Toyota mini truck
4 a nice dinner for two in LA
5 a ticket to a professional basketball game
6 dinner for one at McDonald’s
3 a laptop computer
Price
The measure of relative scarcity
If a product becomes relatively more
scarce, the price will rise.
If a product becomes relatively less scarce,
the price will fall.
Market: An interaction of buyers
and sellers
Necessary Components for a Market
Competition
Information
Property Rights
Incentives
Property Rights
With well defined property rights, owners have
incentives to preserve, develop, and improve
resources
Without well defined property rights, people
have incentives to use resources as quickly as
possible
 over fishing
 The buffalo
Economic Systems
Three Economic Questions
1. What goods will be produced
- What does an economy need to produce to keep its
people alive/happy?
2. How will the goods be produced
- Should government produce things?
- Should things be produced by private citizens?
- Why?
3. Who gets what is produced
- Will everyone automatically get what is
needed?
- How will you decide who gets what?
Three Types of Economic Systems
1. Traditional Economy
- economic decisions made based on tradition,
customs, cultural beliefs
- self-sufficient, pre-industrial groups
- little or no outside trade – barter system
2. Command Economy, Socialism
Government ownership of all means of
production – all business (factories, farms)
-The “THEORY”
Everyone contributes according to their
ability and receives according to their need
Advantages of Socialism
- guaranteed employment
- guaranteed housing
- free education
- free medical care
Disadvantages of socialism
- little incentive to work hard (why??)
- inefficient methods of production (more jobs)
- inhibits innovation, creativity (no self-interest)
- consumer has little choice (no competition)
3. Market Economy, Capitalism, Free Enterprise
System
- all business decisions are made by business
owners and consumers
- all decisions based on self-interest
Self-interest is the motivator
- competition is essential
Competition is the regulator
- property rights are protected
- prices fluctuate based on interaction of supply
and demand
Advantages of capitalism
- hard work is rewarded
*overtime pay, raise, promotion
- innovation is encouraged – increase profit
- flexibility – change happens easily
- quality goods are produced and sold at a
fair price (competition)
Disadvantages of capitalism
- unequal distribution of income
*few rich, some middle, some poor
- financial insecurity bankruptcy, unemployment
- high cost of education, health care
- subject to inevitable swings of the Business Cycle
Reality Check
Modern national economies are all a mix of some
capitalism and some socialism – Mixed Economies
United States - minimum wage, social security,
medicare, anti-monopoly legislation
China – encourages individuals to own businesses
and make profit
North Korea – closest to pure socialism