AP Micro-/Macroeconomics Unit I
Basic Economic Concepts
The Economic Way of Thinking
AP Microeconomics Unit I – Basic Economic Concepts
What does the saying “There’s no such thing asa free lunch” mean?
Objectives
•Define opportunity cost
•Define economic way of thinking
•Apply scarcity concepts to variety of economic and noneconomicsituations.
Introduction
•A.P. Economics has thousand of details that can sometimes beconfusing.
•This lesson will acquaints you with some basic economic conceptsand methodology.
What is Economics?
•Comes from Greek words oikos (“house”) and nomos (“custom” or“law”), thus “rules of the house”
•What are we managing?
•Unlimited wants and needs
•How do we know they’re unlimited?
What is Economics?
•Society and Scarce Resources
•We use resources to meet wants and needs, but resources are limited
•Factors of production: land, labor, capital, entrepreneurship/ideas
•Scarcity – society has limited resources, cannot produce all the goods andservices people wish to have
•Economics is the study of scarcity
•How does society allocate scarce resources to meet unlimited wants and needs?
The Economic Way of Thinking
•Everything has a cost.
•“there is no such thing as a free lunch”
•every action costs someone time, effort or lost opportunities to dosomething else.
Opportunity cost is the real cost of an item, including what must be given up to obtain it
people incur costs when making decisions, even when people appear to pay nothing.
•People choose for good reasons.
People always face choices, however, if people have different values, they may makedifferent choices.
Most of AP Economics concerns business and government decision making. (Remember,these decisions are made by people.)
Normative economics “makes prescriptive statements about how theeconomy should work” (Krugman G-7)
Positive economics “describes the way the economy actuallyworks” (Krugman G-7)
•Incentives matter.
Many believe economics is all aboutincentives.
Supply and demand is about incentives
Theory of the firm and factor markets areabout incentives.
Government decision making is aboutincentives
Incentives change, people’s behaviorchanges in predictable ways.
•People create economic systems toinfluence choices and incentives.
Cooperation among people is governed by written and unwrittenrules that are the core of an economic system.
As rules change, incentives and behavior change.
The success of market systems and the failure of communism arerooted in incentives.
•People gain from voluntary trade.
•People will trade when they believe the trade makesthem better off.
•Always remember throughout this course that it ispeople, not countries, that trade and make decisions.
•Economics is all about trade.
•Economic thinking is marginal thinking.
•Marginal choices involve the effects of additions andsubtractions from current conditions.
•A great deal of this course is about marginal costs andbenefits and will be discussed in every unit.
•The value of a good or service is affected by people’s choices.
o Goods and services do not have intrinsic value; their value is determineby the preferences of buyers and sellers.
o Intrinsic Value is the “value of a company or an asset based on an underlyingperception of the value.” (“Intrinsic Value”)
oBecause of this, trading moves goods and services to higher-valued uses.This is why trading is so important.
oThe price of a good or service is set by supply and demand.
•Economic actions create secondary effects.
•Good economics involves analyzing secondaryeffects.
•Example: rent controls make apartments moreaffordable to some consumers.
•Controls also make it less profitable to build andmaintain apartments.
•The secondary effect is a shortage of apartmentsand houses for rent.
•The test of a theory is its ability to predict correctly.
You will discuss many theories in AP Economics – all of these theorieshave simplifying assumptions
If the theory correctly predicts theconsequences of actions, it is a good theory.
Nothing is “good in theory but bad inpractice.”
Do Activity 1 – Do You Think Like an Economist?
1.Because it is desirable, sunshine is scarce. TF
Sunshine isn’t scarce because it isn’t limited;it is a free good.
2.Because it is limited, polio is scarce.2.Because it is limited, polio is scarce.
TF TF
Polio isn’t scarce because it isn’t desirable.
3.Because water covers three-fourths of the earth surface and isrenewable, it cannot be considered scarce. TF
Scarcity is a relative, not an absolute, concept.Because resources are scarce and wants areunlimited, almost everything to scarce. If you pay anopportunity cost to use a good or service, it is scarce.If you pay a positive price for a good or service, it isscarce. Water may cover three-fourths of the earthbut we pay an opportunity cost and a positive pricefor clean water everywhere. Of course, water maybe scarce in the desert than in the wetlands. Only agovernment can actually make water cheaper in adesert.
4.The main cost of going to college is tuition, room, and board.TF
An important opportunity cost of going tocollege is lost earnings. If you could earn$20,000 a year by working, you will sacrifice$80,000 during four years of college.
5.If mass transportation fares are raised, almost everyone willtake the trains anyway.TF
It is false because, if all other things areequal, less mass transportation will bepurchased if the price is higher. The pricecould be increased in terms of dollars,inconvenient schedules, crime and filthy cars.The demand curve for transportation wouldhave to be perfectly inelastic, or vertical, forthe answer to this question to be True. (Wewill discuss this issue later in the semester.)
6.You get what you pay for. TF
The price of something depends on supplyand demand, not on usefulness or on somecriterion of quality. Water is more useful thandiamonds, but it has a lower price. What youpay for a good or service depends on themarket price determined by supply anddemand.
Both Q-5 & Q-6 deal with the law of supply and demand. Peopletend to buy more of something when the price is lower andless when the price is higher.
Price includes money as well as such things as time,aggravation, inconvenience and moral guilt. Sellers will try tosell more of something if the price is higher and less of it ifthe price is lower. This conflict resolved through the market.
7.If someone makes an economic gain, someone else loses.TF
8.If one nation produces everything better than another nation,there is no economic reason for these two nations to trade.TF
Both Q-7 and Q-8 concern gains from trade. When people tradevoluntarily, both parties expect to gain, or they wouldn’t trade.
One reason for this gain is the law of comparative advantage if oneperson does legal work better than another and if a secondperson word-processes documents better than the first, theywould gain by trade.
But would a lawyer who is the fastest word processor in townhire a secretary? Yes, because of comparative advantage: Eachperson would specialize in what he or she does comparativelybetter.
An hour spent word processing would is an hour not spent inlegal work, and the opportunity cost for the lawyer would be veryhigh. The lawyer will specialize in legal work and the secretary inword processing. The total output of goods and services willincrease. This concept can also be applied to countries.
9.A nonregulated monopoly tends to charge the highest possibleprice.TF
A monopoly charges a higher price than acompetitive market price, but the monopolistcannot repeal the law of demand. If the priceis too high, the monopolist might sell nothing.A monopolist will try to establish a price at apoint that will make the greatest profit. Thisprice is higher than a competitive price andwill result in less production.
10. A business owner’s decision to show more care forconsumers is a decision to accept lower levels of profits.TF
Profits are an incentive for business to succeed. Abusiness that doesn’t care about its customers will notmake high profits. As Adam Smith (1723-1790) said, “Itis not from the benevolence of the butcher, the brewer orthe baker that we expect our dinner, but from theirregard for their own interest. We address ourselves notto their humanity but to their self-love, and never talk tothem of our own necessities but of their advantages.”
The Production Possibilities Curve:Scarcity, Trade-offs, and OpportunityCosts
AP Microeconomics Unit I – Basic Economic Concepts
Warm-up
•Is there any limit to what the United States can produce?
•Is there any limit to what you can buy?
Today’s Objectives
1.Define scarcity, opportunity cost, and trade-offs.
2.Identify the conditions that give rise to the economic problem of scarcity.
3.Identify the opportunity costs of various recent decisions made by your school oryour community.
4.Construct PPCs from sets of hypothetical data.
5.Apply the concept of opportunity cost to a PPC.
6.Analyze the significance of different locations on, above, and below a PPC.
7.Identify the three questions every economic system must answer.
When faced with SCARCITY of resources, decisions have to bemade about how to use those resources
•Trade-offs
•Opportunity costs
Trade-offs
•This is the decision making process that is occurring in your mind right now!
•Am I going to pay attention to what Mr. White is saying, or am I going todaydream?
•Am I going to come to class or go buy a lottery ticket?
•Am I going to stay in school or go find a full time job?
•Each and every decision you make has a cost!!! Not necessarily a cost indollar terms, but a cost in that you must give up something in order to getmore of something else.
Opportunity Cost
•The “price you pay” for each decision you make is called theOPPORTUNITY COST.
•Opportunity cost is vital to the understanding of economics.
•“The amount of a product or service that must be forgone (givenup) in order to obtain more of the next best alternative productor service”
Production Possibilities curve(sometimes referred to as a production possibilities frontier)
•Used to illustrate:
•Productive Capacity
•Opportunity Costs
•Efficiency
•Productive
•Allocative
• Economic Growth/Decline
•Vital Link to Aggregate Supply (short/long run)
Production Possibilities Curve
Production Possibilities Curve
•The type of land resource suitable for growing Wheat is DIFFERENTthan the land resource for growing Rice.
•If a society wants MORE Rice, then as you convert land suitable forgrowing Wheat (arable, relatively dry) so that you can grow Rice (wet,swampy) it will become MORE costly to do that, in terms of Wheatproduction
•We have INCREASING OPPORTUNITY COSTS of producing Rice interms of Wheat
Production Possibilities Curve
•Economies produce MORE that just Wheat and Rice.
•We produce LOTS of goods of many different types.
•We can broadly categorize goods into TWO categories
•Capital Goods
•Consumer Goods
The best way to illustrate Trade-Offs andOpportunity Costs is to use a ProductionPossibilities Curve
•The PPC shows the relationship between two goods:
1.Capital Goods (Investment Goods): Goods that satisfy ourwants INDIRECTLY and promote future growth or“happiness” – Delayed gratification.
2.Consumer Goods: Goods that satisfy our wants DIRECTLY.Instant Gratification
Production Possibilities Curve
Production Possibilities Curve
•The reason the PPC is bowed is becauseof INCREASING OPPORTUNITYCOSTS.
•At Point A the economy gives up 10capital goods in order to get 400 consumergoods.
•400 Consumer goods = 10 Capital goods
•1 Consumer good = 10 Capital goods/400
•1 Consumer good = .025 Capital good
Production Possibilities Curve
•The reason the PPC is bowed is becauseof INCREASING OPPORTUNITYCOSTS.
•At Point B the economy gives up 10Capital goods in order to get 200 moreConsumer goods.
•200 Consumer goods = 10 Capital goods
•1 Consumer good = 10 Capital goods/200
•1 Consumer good = .05 Capital good
Production Possibilities Curve
•The reason the PPC is bowed is because ofINCREASING OPPORTUNITY COSTS.
•Not all resources are adaptable to alternativeuses.
•Resources used for Capital Goods may notbe suitable to make Consumer Goods (andVice Versa)
•Marsh land suitable for growing rice couldnot easily be converted for use as a anairport. It would be much more costly thanusing farmland in Kansas.
Production Possibilities Curve
•Let’s take a closer look at the PPC
•What do the different points on thePPC represent?
Production Possibilities Curve
•Each point represents ProductiveEfficiency
•This means that this economy isallocating ALL of it productiveresources in the least costly way
Production Possibilities Curve
•There are an infinite number ofpoints on the PPC. Where asociety decides to produce is calledAllocative Efficiency.
•This represents the combination ofCapital and Consumer Goods mostdesired by the society
Production Possibilities Curve
•The whole PPC represents FULLPRODUCTION
•Productive efficiency
•Full employment of resources
Production Possibilities Curve
•Do economies always produce onthe PPC? NO!
•Point E represents a point inside thePPC.
•The area between point E and thePPC represents underutilization ofresources or under-employment ofresources or unemployment. Theeconomy is being inefficient.
Production Possibilities Curve
•Do economies always produce on thePPC? NO!
•Point F represents a point outside thePPC.
•The area between point F and the PPCrepresents overutilization of resources
•It represents a combination of Capitaland Consumer Goods that is currentlynot possible with this economy’sresources
Scarcity is the fundamental economic problem
•In order to solve the dilemma of scarce resources beingneeded to fulfill unlimited wants, we must be answer the3 fundamental economic questions
•What to produce?
•How to produce?
•For whom to produce?
Do activity 1-2
Absolute Advantage and ComparativeAdvantage, Specialization and Trade
AP Microeconomics Unit I – Basic Economic Concepts
Objectives
•Define comparative advantage and absolute advantage.
•Describe and give examples of the law of comparative advantage.
•Explain how both parties in a trade gain from voluntary exchange.
•Define specialization and exchange.
•Use data to determine absolute and comparative advantage.
Introduction
•Activity 1-3 introduces absolute advantage and comparative advantage.
•Concepts will be covered in more detail in the international-trade unit.
•People trade because both parties stand to benefit when they engage involuntary exchanges.
Absolute Advantage andComparative Advantage
•What would life be like, if every person had to be totally self-sufficient andcould not specialize and trade.
•You always have to remember that individuals, not nations, trade. However,specialization and trade can be accomplished both domestically andinternationally.
•The more we trade, the better off we all are.
Absolute Advantage andComparative Advantage
•ABSOLUTE ADVANTAGE
•One nation can produce more output with the same resources as the other.
•COMPARATIVE ADVANTAGE
•One nation can produce a good at a lower opportunity cost than the other.
•EXAMPLES OF COMPARATIVE ADVANTAGE
•Lawyer and secretary
•Doctor and nurse
•Comparative advantage is a powerful concept that helpsexplain how mutual benefits can occur from exchange.
•A nation and an individual have a comparative advantagewhen they can make one or more products at a loweropportunity cost than another nation or individual.
•When producers specialize in the lower-cost product, theycan make additional goods. Which they can trade to otherproducers for goods that would have been more costly tomake.
•To determine a comparative advantage, costs must bemeasured in terms of what other products must be forgoneto make particular product. This relative measure is a subtle,difficult and very important idea to understand.
•A nation’s or an individual’s comparative advantage willchange as the opportunity costs of products made availableby different trading partners change.
Absolute Advantage andComparative Advantage
•We discussed earlier the idea of a lawyer hiring a secretary in the field ofword processing.
•Remember we stated that the opportunity cost of the lawyer’s time spent as a secretaryis very high, perhaps $100 or more. The lawyer could even hire more than onesecretary for this amount and still come out ahead.
•The doctor/nurse situation is the same as the lawyer/secretary situation.
Determining Comparative Advantage(Output Method)
•1. Which nation has an absolute advantage in producing CDs?
•2. Which nation has an absolute advantage in producing beef?
•3. Which nation has a comparative advantage in producing CDs?
•4. Which nation has a comparative advantage in producing beef?
•5. Should Japan specialize in CDs or beef?
•6. Should Canada specialize in CDs or beef?
Neither country
Canada
Japan
Canada
CD’s
Beef
Determining Comparative Advantage(Input Method)
•1. Which nation has an absolute advantage in producing CDs?
•2. Which nation has an absolute advantage in producing beef?
•3. Which nation has a comparative advantage in producing CDs?
•4. Which nation has a comparative advantage in producing beef?
•5. Which country should specialize in CD production?
•6. Which country should specialize in producing beef?
Mexico
Mexico
Japan
Mexico
Japan
Mexico
Activity 1-3
•You will be doing an activity that illustrates the same concept as itrelates to comparative advantage using inputs (minutes or hoursto produce a good) and outputs (number of goods produced perhour or per minute).
•The key is that if one party trades the good for which it has thelower opportunity cost for the good for which the other party hasthe lower opportunity cost, both parties gain.
Productivity
AP Microeconomics Unit I – Basic Economic Concepts
Productivity
Ratio of the amount of goods and services produced (output) perunit of productive resources used (input).
As a ratio, productivity can be increased by:
•producing more goods and services with the same amount of resources
OR
•by producing the same amount of goods and services with fewer resources.
Productivity
Personal and national standards of living are directly related to laborproductivity.
•The greater an individual’s labor productivity, the higher wage that individual cancommand.
•People must produce more per person if they are to receive more per person.
Individual workers can increase productivity by investing ineducation and training (human capital).
PIZZA PARTY!!!
Participate in a simulation that will demonstrate:
•How productivity is calculated
•The factors that can increase productivity
Work in teams of four to produce pizzas (made of paper).
How to make a pizza:
•Trace the template (a small paper plate) on a piece of 8.5″ x 11″ paper.
•Cut out the circle.
•Draw 10 pepperoni pieces, about 1″ in diameter, on the pizza, using the redmarker.
•Draw 15 black olive slices, ½″ to ¾″ in diameter, on the pizza, using theblack marker.
PIZZA PARTY!!!
•Each round will be three minutes long.
•At the end of each round, quality control experts will determineif pizzas meet standards.
•Complete the data chart (Activity 8.1).
•Round 1:
•Each employee will work alone.
•Employees must complete one pizza before moving on to the next.
Thoughts on how to improve productivity?
Round 2:
•Assign each employee a different task.
•You may work on more than one pizza at a time.
•You are limited to the same resources as in Round 1.
Thoughts on how to improve productivity?
Round 3:
•Each team may acquire a capital good: a machine that pre-cuts pizza dough(paper plates).
•Machine rental is $2.50 per round.
•Reorganize the factory.
How was productivity calculated?
Labor productivity = output per worker over a set time
•What happened to productivity between Round 1 and Round 2, and betweenRound 2 and Round 3? Why did this occur?
•What happened to quality between Round 2 and Round 3?
•What effect did investing in capital goods (the pizza-cutting machine) haveon productivity?
•What effect did increased productivity have on average costs (row 10,Activity 8.1)? Why is this important?
•What effect will increased productivity in the pizza factoryhave on wages?
•What happens if labor productivity increases in the overalleconomy?
•What costs were incurred by attempts to increaseproductivity?
•What are the advantages and disadvantages ofspecialization and division of labor?
•What else could the pizza factory do to increaseproductivity?
•What should a company consider before investing incapital, such as the pizza-cutting machine?
Factors That Increased Productivity
•Specialization/division of labor
•Assigning small, repeatable tasks at which workers gain expertise, as in Round 2
•Results in more output per unit of labor
•Increase in human capital
•Acquired through education/training, displayed in all three rounds
•Investment in capital goods
•Tools/machines/factories as in Round 3
•Technology
The Laws of Demand and Supply
AP Microeconomics Unit I – Basic Economic Concepts
Markets and Competition
•A market is a group of buyers andsellers of a particular good orservice.
•The terms supply and demand referto the behavior of people . . . asthey interact with one another inmarkets.
Markets and Competition
•Buyers (consumers) determinedemand
•Sellers (producers) determinesupply
DEMAND
•Quantity demanded is the amount of a good that buyers are willing andable to purchase.
•Law of Demand
•The law of demand states that, other things equal (ceteris paribus), the quantitydemanded of a good falls when the price of the good rises.
•Substitution Effect
•Consumers have an incentive to substitute what is now a less expensive product for similar productsthat are now relatively more expensive
•Income Effect
•Lower price raises real income, enabling buyers to buy more of the product
The Demand Curve: The Relationship betweenPrice and Quantity Demanded
•Demand Schedule
•The demand schedule is a table that shows the relationship between theprice of the good and the quantity demanded.
Catherine’s Demand Schedule
The Demand Curve: The Relationship betweenPrice and Quantity Demanded
•Demand Curve
•The demand curve is a graph of the relationship between the price of agood and the quantity demanded.
Catherine’s Demand Schedule and DemandCurve
Market Demand versus Individual Demand
•Market demand refers to the sum of all individual demands for a particulargood or service.
•Graphically, individual demand curves are summed horizontally to obtain themarket demand curve.
Shifts in the Demand Curve
•Change in Quantity Demanded
•Movement along the demand curve.
•Caused by a change in the price of the product.
Changes in Quantity Demanded
Shifts in the Demand Curve
•Change in Demand
•A shift in the demand curve, either to the left or right.
•Caused by any change that alters the quantity demanded atevery price.
Shifts in the Demand Curve
•Determinants of Demand – a change in any of the following causes achange in demand and will shift the curve:
•Number of consumers
•Income of consumers
•Complement price
•Expectations
•Substitute price
•Tastes and preferences
Shifts in the Demand Curve
Shifts and Changes in Demand (cont.)
•A closer look at changes in income:
•Normal Good (or Luxury Good)
•Consumers demand more when theirincome increases
•Inferior Good
•Consumers demand less when theirincome increases
Consumer IncomeNormal Good
Consumer IncomeInferior Good
Diminishing Marginal Utility
•Principle of Diminishing Marginal Returns: general tendencyfor marginal utility to decrease as the quantity of a goodconsumed increases
•Can be used to determine one’s individual demand curve for aproduct
•Measured in units of utility
Consumer Surplus
•Consumer Surplus = marginalbenefit from a good minus theprice paid for that good, summedover the quantity consumed
SUPPLY
•Quantity supplied is the amount of a good that sellers arewilling and able to sell.
•Law of Supply
•The law of supply states that, other things equal (ceterisparibus), the quantity supplied of a good rises when theprice of the good rises.
The Supply Curve: The Relationship betweenPrice and Quantity Supplied
•Supply Schedule
•The supply schedule is a table that shows the relationshipbetween the price of the good and the quantity supplied.
Ben’s Supply Schedule
Price of Ice Cream Cones
Quantity of Cones Supplied
$0.00
0
0.50
0
1.00
1
1.50
2
2.00
3
2.50
4
3.00
5
The Supply Curve: The Relationship betweenPrice and Quantity Supplied
•Supply Curve
•The supply curve is the graph of the relationship between theprice of a good and the quantity supplied.
Ben’s Supply Schedule and Supply Curve
Market Supply versus Individual Supply
•Market supply refers to the sum of all individual supplies for all sellers of aparticular good or service.
•Graphically, individual supply curves are summed horizontally to obtain themarket supply curve.
Shifts in the Supply Curve
•Determinants of Supply– a change in any of the following causes a changein supply and will shift the curve:
•Resource prices
•Expectations
•Number of producers
•(level of) Technology
•Government actions (taxes, subsidies, regulations)
•Other (related) goods prices
Shifts in the Supply Curve
•Change in Quantity Supplied
•Movement along the supply curve.
•Caused by a change in the price of the product.
Change in Quantity Supplied
Shifts in the Supply Curve
•Change in Supply
•A shift in the supply curve, either to the left or right.
•Caused by a change in a determinant other than price.
Shifts in the Supply Curve
Producer Surplus
•Producer Surplus: amount seller ispaid minus the seller’s cost
•Also the area under the equilibriumprice and above the supply curve
•(HINT: Same way as consumersurplus…)
SUPPLY AND DEMAND TOGETHER
•Equilibrium refers to a situation in which the price has reachedthe level where quantity supplied equals quantity demanded.
•Equilibrium Price and Quantity
•On the graph, it is where supply and demand intersect
SUPPLY AND DEMAND TOGETHER
Demand Schedule
Price of Ice Cream Cone
Quantity Demanded
$0.00
19
0.50
16
1.00
13
1.50
10
2.00
7
2.50
4
3.00
1
Supply Schedule
Price of Ice Cream Cone
Quantity Supplied
$0.00
0
0.50
0
1.00
1
1.50
4
2.00
7
2.50
10
3.00
13
The Equilibrium of Supply and Demand
Disequilibrium
•Surplus
•When price > equilibrium price, then quantity supplied >quantity demanded.
•There is excess supply or a surplus.
•Suppliers will lower the price to increase sales, therebymoving toward equilibrium.
Markets Not in Equilibrium
Disequilibrium
•Shortage
•When price < equilibrium price, then quantity demanded >the quantity supplied.
•There is excess demand or a shortage.
•Suppliers will raise the price due to too many buyerschasing too few goods, thereby moving toward equilibrium.
Markets Not in Equilibrium
Equilibrium
•Law of Supply and Demand
•The price of any good adjusts to bring the quantity suppliedand the quantity demanded for that good into balance.
How an Increase in Demand Affects theEquilibrium
How a Decrease in Supply Affects theEquilibrium
Economic Systems
How do we answer the 3 main economic questions?
3 questions faced by everysociety3 questions faced by everysociety
•What to produce?
•How to produce ?
•For whom to produce?
3 Types of economies3 Types of economies
Command Economy
•All economic decisions made solely by the government
•Gov’t owns or controls most resources
•Planners decide what to produce, how to produce, and for whom to produce.
•Command decisions can be democratic or authoritarian.
•Citizens living under the command economy have NO freedom of choice.
Command Economy (cont.)
•Some examples of command economy include China and U.S.S.R
•Under the command economy, the U.S.S.R collapsed, leading us to questionwhether or not the command economy can succeed.
Pure Market Economy
•All economic decisions are made by people engaged in voluntary exchange.
•Consumers determine what to produce while producers determine how toproduce.
•All resources are privately owned.
•Government’s role limited to providing laws protecting property rights.
Pure Market Economy
•Income depends on the productive resources a person has to sell.
•Market prices are signals that affect consumption and production.
•Sometimes called free enterprise system or capitalism
Traditional Economy
•Economic decisions repeat those made in earlier times.
•Economic decisions heavily influenced by religion and culture
•Traditional economy is often found in underdeveloped, agricultural parts ofSouth America, Asia and Africa.
Mixed Economy
•Mixed economy incorporates aspects from all of the different systems ofeconomy.
•The United States is an example of a mixed economy.We have a diverse mixof freedoms and regulations that is constantly changing in our economy.
Marginal Analysis
How much of something should we do?
Will you do all you can to get an A on your testMonday?
•Why do you want an A?
•What’s the benefit of an A over a B or C?
•What will you give up to study the amount of time needed to get an A?
Marginal analysis
•What it is: the tool economists use to make these allocation decisions
•It’s simple!
•If the marginal benefit from another unit of some activity exceeds the marginal costof that unit, you should undertake that extra unit of the activity.
•If the marginal benefit of the extra unit is less than the extra cost of that unit, do nottake on the extra unit.
MC-MB Graph
So…
Given the marginal cost of each extra hour devoted to studying for your exam,compared to the marginal benefit of receiving an A rather than a B or a C, howmany hours are you really willing to devote to your exam???