The Economic Way of Thinking
19
Marginal Analysis Comparing benefits and costs. Marginal – means “extra, additional, one more” Marginal Cost (MC) – What does it cost to go to the next level or to get one more item? Marginal Benefit (MB) – What pleasure or “utility” do you get out of the next level or item? Incentive ◦ Why do we act? ◦ We do it when MB is greater than or equal to MC. The Economic Way of Thinking
-
Upload
bradley-mcpherson -
Category
Documents
-
view
27 -
download
0
description
The Economic Way of Thinking. Marginal Analysis Comparing benefits and costs. Marginal – means “extra, additional, one more” Marginal Cost (MC) – What does it cost to go to the next level or to get one more item? - PowerPoint PPT Presentation
Transcript of The Economic Way of Thinking
Marginal Analysis Comparing benefits and costs. Marginal – means “extra,
additional, one more” Marginal Cost (MC) – What does it
cost to go to the next level or to get one more item?
Marginal Benefit (MB) – What pleasure or “utility” do you get out of the next level or item?
Incentive◦Why do we act?◦We do it when MB is greater than or
equal to MC.
The Economic Way of Thinking
Hours Econ Score Math Score
0 0 0
1 26 24
2 48 44
3 61 62
4 73 75
5 83 84
6 91 91
7 97 96
8 100 100
Marginal Analysis Example
PRODUCTION POSSIBILITIES
Assumes...
•Full Employment•Full Production•Fixed Resources•Fixed Technology•Two Goods
for example...
PRODUCTION POSSIBILITIESAssumes...
Full Employmentand ProductiveEfficiency
Fixed ResourcesFixed TechnologyTwo Goods
for example...
PIZZA
A Consumer Good
Two Goods
Fixed ResourcesFixed Technology
Assumes...
Full Employmentand ProductiveEfficiency
PRODUCTION POSSIBILITIES
for example...
Robots
A Capital Good
Using all of our resources, to get some pizza, we must giveup some robots!
for example...
What if we could only produce ...
10,000 Robotsor
400,000 Pizzas
PRODUCTION POSSIBILITIES
PIZZA 0 1 2 34(in hundred thousands)ROBOTS 10 9 7 40(in thousands)
in table form
PRODUCTION POSSIBILITIES
PIZZA 0 1 2 34(in hundred thousands)ROBOTS 10 9 7 40(in thousands)
in table form
graphical formR
obots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
PIZZA 0 1 2 34(in hundred thousands)ROBOTS 10 9 7 40(in thousands)
in table form
graphical formR
obots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
PIZZA 0 1 2 34(in hundred thousands)ROBOTS 10 9 7 40(in thousands)
in table form
graphical formR
obots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
PIZZA 0 1 2 34(in hundred thousands)ROBOTS 10 9 7 40(in thousands)
in table form
graphical formR
obots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
PIZZA 0 1 2 34(in hundred thousands)ROBOTS 10 9 7 40(in thousands)
in table form
graphical formR
obots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
PIZZA 0 1 2 34(in hundred thousands)ROBOTS 10 9 7 40(in thousands)
in table form
graphical formR
obots
(th
ou
san
ds)
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Q
Q
Rob
ots
(th
ou
san
ds)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
A B
C
D
E
W
Attainablebut
Inefficient
Unattainable
Attainable& Efficient
PRODUCTION POSSIBILITIES
An economy must sacrifice some of product X to obtain more of product Y.
PRODUCTION POSSIBILITIES
Limited Resources meansa limited output...
Economic resources are not completely adaptable to other uses
To make more of X it costs more and more of Y
This makes the PPC:◦ Bowed out from the origin◦ Concave
Law of IncreasingOpportunity Cost
Q
Q
Robots
(thousa
nds)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
U
Unemployment &Underemployment Shown by Point U
More of either orboth is possible
PRODUCTION POSSIBILITIES
Q
Q
Rob
ots
(th
ou
san
ds)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
U
Unemployment &Underemployment Shown by Point U
More of either orboth is possible
PRODUCTION POSSIBILITIES
Notes...Economic Growth1. Increase in
resource supplies
2. Better resource quality
3. Technological advances
4. Capital Goods
Economic Growth
Q
Q
Rob
ots
(th
ou
san
ds)
Pizzas (hundred thousands)
1413121110 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
A’
B’
C’
D’
E’
PRODUCTION POSSIBILITIES
