ALESSANDRO GIGLI

FACOLTA‘ dI GIURISPRUDENZA

CLASSE: LMG/01

PROF. GALEAZZI - ECONOMICS -

SHORT REPORTS - MICROECONOMICS

MARGINAL CHANGES

PRODUCTION FUNCTION

INCENTIVES

THE TOPICS CHOSEN FOR THE REPORT ARE:

MARGINAL CHANGES

INTRODUCTION

DECISIONS IN EVERYDAY'S LIFE ARE NOT ALWAYS CLEAR BUT THEY HAVE SHADES

MEANING

MARGINAL CHANGES ( WHICH IS THE THIRD PRINCIPAL OF ECONOMICS) IS THE TERM USED TO DESCRIBE SMALL INCREMENTAL ADJUSTMENTS TO AN EXISTING PLAN OF ACTION

BY COMPARING THE MARGINAL BENEFITS AND MARGINAL COSTS YOU CAN EVALUATE WHAT IS THE MOST USEFUL OPTION

EXAMPLE:

IF WE CONSIDER THE OWNER OF A CINEMA DECIDING HOW MUCH TO CHARGE THE CLIENTS WHO BUY LAST MINUTE TICKETS

OWNER COULD GROW ITS PROFIT BY THINKING AT THE MARGIN

MARGINAL BENEFITS AND MARGINAL COSTS

IF THE SHOW IS ABOUT TO BEGIN WITH 10 EMPTY SEATS AND SOMEONE WANTS TO BUY A LAST MINUTE TICKET AT THE PRICE OF € 8,00, THE OWNER SHOULD SELL IT TO HIM, BECAUSE THE COST OF ADDING ONE MORE CLIENT IS TINY

THE MARGINAL COST IS JUST THE COST OF A BAG OF POPCORN, THAT IS INCLUDED IN THE PRICE OF THE TICKET, THAT THE EXTRA CLIENT WILL CONSUME

AS LONG AS THE EXTRA CLIENT PAYS MORE THAN THE MARGINAL COST, SELLING HIM THE TICKET WILL BE WORTHWILE.

INCENTIVES PEOPLE RESPOND TO INCENTIVES

INCENTIVES HAVE AN ESSENTIAL IMPORTANCE FOR PUBLIC POLICY MAKERS BECAUSE MANY POLICIES CHANGE THE COSTS OR BENEFITS THAT PEOPLE FACE AND ALTER THEIR BEHAVIOUR

EXAMPLE:

THE POLICYMAKERS HAVE MADE A LAW REQUIRING COMPULSORY AIRBAGS IN CARS

THIS LAW CHANGES THE BEHAVIOUR BECAUSE PEOPLE DRIVE THEIR CAR MORE CAREFULLY AND SLOWLY BUT THIS IS COSTLY BECAUSE IT TAKES MORE ENERGY AND TIME FROM THE DRIVER

RATIONAL PEOPLE COMPARE THE MARGINAL BENEFIT TO THE MARGINAL COST

WE HAVE TO CONSIDER HOW THIS LAW CHANGES THE WAY PEOPLE CALCULATE COST AND BENEFIT

PEOPLE RESPOND TO AIRBAGS DRIVING FASTER AND THIS CAUSES MORE ACCIDENTS AND INCREASES THE NUMBER OF INJURED PEDESTRIANS

PRODUCTION FUNCTION

I WILL TAKE THE EXAMPLE OF JOHNS' SWEET FACTORY

THE OWNER CAN MODIFY THE QUANTITY OF SWEETS PRODUCED ONLY BY CHANGING THE NUMBER OF WORKERS

WE CAN SEE HOW THE QUANTITY OF SWEETS JOHNS' FACTORY PRODUCES PER HOUR DEPENDING ON THE NUMBER OF WORKERS IN THE FIGURE 1

output (quantity ofcookies produced per hours)

Number of workers

marginal product of labor

cost ofworkers

total cost of inputs(cost of factory +cost of workers)

0

1

2

0

40

70

40

30

cost of factory

30 $

30

30

0 $

10

20

30 $

40

50

FIGURE 1

Figure 2

0 1 2

10

20

30

40

50

60

70

Quantity ofOutpunt(cookiesPer Hour)

MEANING

PRODUCTION FUNCTION IS THE RELATIONSHIP BETWEEN THE QUANTITY OF INPUTS (WORKERS) AND THE QUANTITY OF OUTPUT ( SWEETS)

TO UNDERSTAND HOW A COMPANY DECIDE HOW MANY WORKERS TO HIRE AND HOW MUCH OUTPUT TO PRODUCE, WE HAVE TO THINK ABOUT THE THIRD PRINCIPLE OF ECONOMICS, RATIONAL PEOPLE THINK AT THE MARGIN

output (quantity ofcookies produced per hours)

Number of workers

marginal product of labor

cost ofworkers

total cost of inputs(cost of factory +cost of workers)

0

1

2

0

40

70

40

30

cost of factory

30 $

30

30

0 $

10

20

30 $

40

50

FIGURE 1

YOU CAN SEE THAT AS THE NUMBER OF WORKERS INCREASES THE MARGINAL PRODUCT DECLINES, THE SO CALLED " DIMINISHING MARGINAL PRODUCT“

THE PRODUCTION FUNCTION SLOPE (RISE OVER RUN) SHOWS THE CHANGE IN JOHNS' OUTPUT OF SWEETS ( RISE) FOR EACH INPUT (RUN)

THE END