Warm-UpIt’s been a long time since you were last in

economics, but I bet you still used some economic thinking…

Tell me about how you demonstrated some economic thinking over the weekend. Be sure to explain both the CONCEPT and the EXAMPLE in detail. (If you write less than a full paragraph, it’s probably not explained enough.)

Some concepts you might want to consider…

ScarcityChoiceUtility

Trade-offsOpportunity costIncentives

Any of the four factors of production…

Before we start…an experiment Volunteers? Rules

Eat marshmallows one at a timeRecord how happy/satisfied you are after

EACH marshmallow (how much utility that marshmallow brings you)

Must eat continuously (no unreasonable pauses)

Do not drink water during the experimentYou can stop eating whenever you wantNo sharing of marshmallowsOnce you stop eating, you’re done – no starting

again later

Marginal Thinking andProduction Possibility Curve

Or: Economics at lunch

Before we start… The lead singer of the Clash has a problem:

Should I stay or should I go now?

Should I stay or should I go now?

If I stay there will be troubleAnd if I stay it will be doubleSo come on and let me know

How does he make his choice?

Link

Guiding QuestionsSo far, we’ve thought a lot about making choices

to use our scarce resources most efficiently, and how to compare costs and benefits to make those choices. But, our choices aren’t always all-or-nothing decisions, like “Freddy’s or Subway for lunch?” Sometimes our choices are, “how many fries should I eat for lunch?”

What is marginal analysis, and how do we use it?

How do producers use marginal analysis to run their businesses?

Marginal Thinking – A definitionMarginal thinking is used for deciding how

much of something you will do or how many of something you want

DefinitionsMarginal benefit = the benefit (utility) you

receive from consuming one more unit of something

Marginal analysis chartslook like this…. Units(pieces of marshmallow, hours of work, slices of pizza)

Marginal Benefits

Total Benefit

1

2

Etc.

Let’s check in with our contestants… Volunteers:

How many marshmallows did you eat? Why did you stop eating? What would have happened if you ate one

more?

What was the scarce resource in this example?

More Definitions… Marginal cost = the cost you receive from

one more unit of something Law of diminishing marginal utility = A

consumer eventually reaches the point where he/she receives less satisfaction from each additional (marginal) unit of a good consumed

In other words: the more you consume of something, the less you value one additional unit of it

Too Many Cooks in the Kitchen?You’re opening a new restaurant, and you’re

trying to decide how many kitchen staff to hire. Obviously, more is better – right? But you’ve also heard the phrase “too many cooks in the kitchen,” and want to perform some marginal analysis to discover the ideal number of kitchen staff you should hire.

Each new hire costs $10/hour. The marginal benefit of each new staff member is on the next slide…

Units Marginal Benefits

Total Benefit

Marginal Cost

1 $50 $50 $10

2 $30 $80 $10

3 $20 $100 $10

4 $10 $110 $10

5 $5 $115 $10

6 –$5 $110 $10

Let’s come back to the Clash… The lead singer of the Clash has a problem:

Should I stay or should I go now?

Should I stay or should I go now?

If I stay there will be troubleAnd if I stay it will be doubleSo come on and let me knowHow does he make his choice?

A: He should stay, as long as his marginal benefits outweigh his marginal costs. If his marginal costs outweigh his benefits, he should go!

How do producers actually use marginal analysis…? The production possibility curve allows us to

compare the marginal costs and benefits between 2 production options.

The PPC is a graph that shows all the various combinations that can be produced when ALL resources are used most efficiently, given a current level of technology.

Let’s work with an example…

Laurasians You live in Laurasia. Like most Laurasians,

you like to eat pizzas and decorate with fine rugs. The more pizzas and rugs you can get, the happier you are. Unfortunately, making these goods takes time, and you only have six hours per day for production. In one hour you are able to make four pizzas OR two rugs, but not both.

Cut out your production cards now.

Production Possibilities Curve for Laurasians

To sum up… Rational economic thinking is made at the

margin, comparing the costs and benefitsThe Production Possibilities Curve shows the

trade-offs between the production of two goods

The PPC demonstrates scarcity, choice, trade-offs, and marginal thinking… basically everything we’ve talked about!

Vocab: Marginal benefitMarginal cost

Diminishing marginal utility Production possibilities

curve