Marginal Analysis Economics Moraine Park Technical College Introduction

Marginal Analysis Economics Moraine Park Technical College

Introduction l l Understanding Marginal Analysis Learning Plan 2

Topics of Discussion l l l What is Marginal Analysis Marginal Cost Marginal Benefit Marginal Utility Principle of Diminishing Marginal Utility Law of Diminishing Marginal Returns

Marginal l What is Marginal? Marginal means additional, extra, and incremental Every choice has cost and benefit

Marginal Cost l l l What is Marginal Cost? Marginal cost is the choice that includes the extra cost to you over and above the costs you have already incurred. What is your marginal cost in this class?

Other Cost l l l Fixed or Sunk Costs (FC)--Cost that have already been incurred. Or cost that do not vary with changes in output. Variable Costs (VC)--Cost which increase with the level of output. Total Costs (TC)--Cost that is the sum of fixed and variable costs at each level of output.

Other Cost (Continue) l l l Average Fixed Cost (AFC) is the sum of dividing total fixed cost by the corresponding output. Average Variable Cost (AVC) is the sum of dividing total variable cost by the corresponding output. Average Total Cost (ATC) is the sum of dividing total cost by the corresponding output.

Marginal Benefit l l l What is Marginal Benefit is that choice that includes the extra benefit to you over and above the benefits you have already experienced. What is your marginal benefit in this class?

Rule of Marginal Benefit/Cost l If the (expected) marginal benefit of doing something is greater than or equal to the (expected) marginal cost, -------> do l it If the (expected) marginal cost of doing something is greater than the (expected) marginal benefit, -------> don’t do it

Rule of Marginal Benefit/Cost l. If MB=or>C, yes l. If MC>MB, no

Marginal Utility l l l What is Marginal Utility? Marginal Utility means extra or additional satisfaction Example of marginal utility

Principle of Diminishing Marginal Utility l l What is DMU? Diminishing Marginal Utility means that the more we already have of something, the less satisfaction we will get from an additional unit of it.

Law of Diminishing Marginal Returns l The incremental benefit starts to decrease as you continue to increase the inputs. (time, effort, money)