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Marginal

Analysis

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This is what you do when you make a decision.

You weigh your options, and make a choice.

If I do this, then I can’t do that…is it worth it?

Thinking on the Margin

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Marginal AnalysisIn economics the term marginal = additionalMarginal analysis (aka: thinking on the margin)

making decisions based on incrementsExample:• When you decide to go to the mall you consider the

additional benefit and the additional cost (your opportunity cost).

• Once you get to the mall, you continue to use marginal analysis when you shop, buy food, and talk to friends.

• Since your marginal benefits and costs can quickly change your analyzing them every second.

• What if your ex-girlfriend shows up? The Point: You will continue to do something as long as the marginal benefit is greater than the marginal cost

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Marginal Analysis video

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5 Key Economic Assumptions1. Society has unlimited wants and limited resources (scarcity). 2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off).3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.”4. Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.5. Real-life situations can be explained and analyzed through simplified models and graphs.

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Capital Goods

V

Consumer Goods15

Capital v Consumer Goods

Capital Goods

A capital good is any good deployed to help

increase future production. The most common capital

goods are property, plant and equipment, or PP&E.

Consumer Goods

Consumer goods are any goods that are not capital

goods; they are goods used by consumers and have no

future productive use.

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The 4 Factors of Production

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The Four Factors of ProductionALL resources can be classified as one of the

following four factors of production:

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1. Land -All natural resources that are used to produce goods and services. (Ex: water, sun, plants, animals)

2. Labor -Any effort a person devotes to a task for which that person is paid. (Ex: manual laborers, lawyers, doctors, teachers, waiters, etc.)

3. Capital -Physical Capital- Any human-made resource that is used

to create other goods and services ( Ex: tools, tractors, machinery, buildings, factories, etc.)

Human Capital- Any skills or knowledge gained by a worker through education and experience

4. Entrepreneurship -ambitious leaders that combine the other factors of production to create goods and services. • Examples-Henry Ford, Bill Gates, Inventors, Store

Owners, etc.

The Four Factors of Production

Entrepreneurs:1. Take The Initiative2. Innovate3. Act as the Risk Bearers

So they can obtain _________.

Profit = Revenue - Costs

PROFIT

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Resources Video

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PPC and PPF

Production Possibilities Curve

or

Production Possibilities Frontier

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Intro PPC video

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The Production Possibilities Curve

(PPC)Using Economic Models…

Step 1: Explain concept in wordsStep 2: Use numbers as examplesStep 3: Generate graphs from numbersStep 4: Make generalizations using graph

What is the Production Possibilities Curve?• A production possibilities curve (or frontier) is

a model that shows alternative ways that an economy can use its scarce resources

• This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.

4 Key Assumptions• Only two goods can be produced• Full employment of resources• Fixed Resources (Ceteris Paribus)• Fixed Technology

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A B C D E f14 12 9 5 0 00 2 4 6 8 10

Bikes

Computers

NOW GRAPH IT: Put bikes on y-axis and computers on x-axis

Production “Possibilities” Table

Each point represents a specific combination of goods that can be

produced given full employment of resources.

27Copyright ACDC Leadership 2015

Bik

es

Computers

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6

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2

0

0 2 4 6 8 10

A

B

C

D

E

G

Inefficient/ Unemployment

Impossible/Unattainable (given current resources)

Efficient

Production PossibilitiesHow does the PPG graphically demonstrates scarcity,

trade-offs, opportunity costs, and efficiency?

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2 Bikes

2.The opportunity cost of moving from b to d is…

4.The opportunity cost of moving from f to c is…

3.The opportunity cost of moving from d to b is…

7 Bikes

4 Computer

0 Computers

5.What can you say about point G?

Unattainable

1. The opportunity cost of moving from a to b is…

Example:

Opportunity Cost

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The Production Possibilities Curve (or Frontier)

30Copyright ACDC Leadership 2015

PIZZA 0 1 2 3 4CALZONES 4 3 2 1 0

• List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.

• Constant Opportunity Cost- Resources are easily adaptable for producing either good.

• Result is a straight line PPC (not common)

Production PossibilitiesA B C D E

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PIZZA 20 19 16 10 0ROBOTS 0 1 2 3 4

• List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.

• Law of Increasing Opportunity Cost-• As you produce more of any good, the

opportunity cost (forgone production of another good) will increase.

• Why? Resources are NOT easily adaptable to producing both goods.

• Result is a bowed out (Concave) PPC

A B C D EProduction Possibilities

Copyright ACDC Leadership 2015

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Constant vs. Increasing Opportunity Cost

Corn

Wheat

Cactus

Pineapples

Identify which product would have a straight line PPC and which would be bowed out?

Copyright ACDC Leadership 2015

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Econmovies Episode 3: Monsters Inc.

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The Production Possibilities Curve and Efficiency

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Productive Efficiency-• Products are being produced in the

least costly way. • This is any point ON the Production

Possibilities CurveAllocative Efficiency-

• The products being produced are the ones most desired by society.

• This optimal point on the PPC depends on the desires of society.

Two Types of Efficiency

37Copyright ACDC Leadership 2015

Productive and Allocative Efficiency

Bik

es

Computers

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A

B

C

D

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E

Which points are productively efficient?Which are allocatively efficient?

G

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Productively Efficient combinations are A through D

Allocative Efficient combinations depend on

the wants of society (What if this represents a

country with no electricity?)

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Why two types of efficiency?

Size 20 running shoes

Size 10 running shoes

A

Is combination “A” efficient?Yes and No. It is productively efficient but it is not the

combination society wants

2008 Audit Exam

2008 Audit Exam

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Shifting the Production Possibilities Curve

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4 Key Assumptions Revisited• Only two goods can be produced• Full employment of resources

• Fixed Resources (4 Factors)• Fixed Technology

What if there is a change?

3 Shifters of the PPC1. Change in resource quantity or quality 2. Change in Technology3. Change in Trade

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Production Possibilities

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Co

mp

ute

rs

Pizzas

What happens if there is an increase

in population?

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Production PossibilitiesC

om

pu

ters

Pizzas

What happens if there is an increase

in population?

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Production Possibilities

Co

mp

ute

rs

Pizzas

What if there is a technology improvement

in pizza ovens

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Production Possibilities

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Co

mp

ute

rs

Pizzas

What if there is a technology improvement

in pizza ovens

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Production Possibilities

Panama – Favors Consumer Goods

Mexico – Favors Capital Goods

Consumer goods

Cap

ital

Goo

ds

Current PPC

Future PPC

Consumer goods

Cap

ital

Goo

ds

Future PPC

Current PPC

Capital Goods and Future Growth

MexicoPanama49

Countries that produce more capital goods will have more growth in the future.

PPC PracticeDraw a PPC showing changes for each of the

following:Pizza and Computers (3)

1. New computer making technology2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows

Consumer goods and Capital Goods (4)4. Destruction of power plants leads to severe

electricity shortage 5. Faster computer hardware6. Many workers unemployed7. Significant increases in education

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New computer making technology

Co

mp

ute

rs

Pizzas

Question #1

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A shift only for computers

Decrease in the demand for pizza

Co

mp

ute

rs

Pizzas

Question #2

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The curve doesn’t shift!A change in demand

doesn’t shift the curve

Mad cow disease kills 85% of cows

Co

mp

ute

rs

Pizzas

Question #3

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A shift inward only for Pizza

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Destruction of power plants

Cap

ital

Go

od

s (G

un

s)

Consumer Goods (Butter)

Question #4

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Decrease in resources decrease production possibilities for both

Faster computer hardware

Cap

ital

Go

od

s (G

un

s)

Consumer Goods (Butter)

Question #5

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Quality of a resource improves shifting the

curve outward

Many workers unemployed

Cap

ital

Go

od

s (G

un

s)

Consumer Goods (Butter)

Question #6

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The curve doesn’t shift!Unemployment is just a point inside the curve

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Significant increases in education

Cap

ital

Go

od

s (G

un

s)

Consumer Goods (Butter)

Question #7

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The quality of labor is improved. Curve shifts

outward.