DO YOU THINK LIKE AN ECONOMIST ANYTHING WORTH

DO YOU THINK LIKE AN ECONOMIST? ANYTHING WORTH DOING IS NOT NECESSARILY WORTH DOING WELL Marginal Analysis AP Micro

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

SHOULD YOU DO ALL YOU CAN TO EARN A PERFECT GRADE OF 100 ON YOUR NEXT ECONOMICS EXAM?

UNTIL THE LAST UNIT EQUALS…

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?

HOMEWORK? REALLY?

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

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

ESL VOCABULARY 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!

HOW CLEAN IS CLEAN ENOUGH?

ENVIRONMENTAL STATEMENTS Statement 1 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.

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?

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.

POST AUCTION DISCUSSION Explain the logic in making a bid over $1 Costs Total MC of X Do not Do Bid Up $0. 95 $0. 10 $0. 95 $1. 05 $0. 10

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!

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

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.