Thinking and working like an
economist
Today: Marginal benefit
Marginal cost
Graphing
First: Crashers
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If you did not sign the “crash” list on
Monday, you are not able to add this
Econ 1 lecture
If you were here Monday and have not
let me know that you are here, please
do so now
Why am I taking Econ 1?
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Hopefully, you have an interest in
economics
If not, I hope to teach you something
that you will find important to your life
later on
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Lessons learned in this class could help you
make good decisions later on
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Good decisions are usually correlated with
more money
Who is in the light blue shirt?
(Come to class to find out)
Poker and economics
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Opportunity cost
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Don’t ask “what will make me money?”
Ask “what will make me the most money?”
For poker players, you can read more about
opportunity cost at
http://www.cardplayer.com/author/article/all/248/9463
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Game theory
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Understanding your opponents can give you a big
edge in life
Last time…
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Introduction to the 7 core principles of
economics
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Scarcity
Cost-benefit analysis
Incentives matter
Comparative advantage
Increasing opportunity cost
Equilibrium
Efficiency
Today: Begin Unit 1
Basics of supply and demand
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Why is economics important?
A few tools necessary to be a good
economist
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Thinking like an economist
Marginal benefit
Marginal cost
Working with graphs
Thinking like an economist
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Examples
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Surfing
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Driving to work
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Health insurance
Find fastest way to work
Sugar prices in the U.S.
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See F/B
How to successfully think like
an economist
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Come to lecture
Read the text
Think, think, think
Try to understand the “Economic Naturalist”
problems
Ask questions in lecture, section, and office
hours
Understand what is going on before moving
to the next topic
Why is economics important
to study?
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Study people’s and firms’ choices
Theorize general tendencies of behavior
Find ways to increase efficiency of the
economy
If there are more goods and services
available, then there is “more of the
pie” to go around
What is fair?
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Economists generally do not study this,
since it is difficult to determine what is
“fair”
Instead, when possible, economists
often try to find situations in which
some people can be made better off
without hurting others
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These situations are called Pareto
improvements
Potential Pareto improvements
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International trade
Removal of complaints from overbooked
flights
Replacing pollution controls with
marketable permits (advanced idea)
Improving property rights
What are some things that
economists study?
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Individual markets
(microeconomics)
An economy as a
whole
(macroeconomics)
This class addresses
microeconomic
issues
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Individual topics
include:
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Highway congestion
Marriage markets
Education
The environment
Labor markets
Health
International trade
Marginal analysis
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One of the most important ideas in
economics
When you hear “marginal,” think “one
additional unit”
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Example: F/B describe marginal benefit as
“the increase in total benefit that results
from carrying out one additional unit of an
activity” (p. 12)
Marginal analysis
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An example
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You have $10 available to buy energy
drinks today
Each energy drink costs you $2
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Any money left over can be used to buy other
items
Should you buy 5 energy drinks today?
Solution
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Buy an additional energy drink if
Marginal Benefit (MB) exceeds Marginal
Cost (MC)
If MB = MC, you are indifferent about
buying an additional energy drink
If MB < MC, you will not buy an
additional energy drink
Your benefit schedule
# of drinks
Total benefit ($)
0
0
MB ($)
Avg. benefit
N/A
5
1
5
5
3
2
8
4
2.5
3
10.5
3.5
1.5
4
12
3
-1
5
11
2.2
What should we do?
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# of drinks
Total benefit ($)
0
0
MB ($)
Avg. benefit
N/A
5
1
5
5
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3
2
8
4
2.5
3
10.5
3.5
1.5
4
12
3
-1
5
11
2.2
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We should buy the third
energy drink since
MB > MC
(2.5 > 2)
We should not buy the
fourth energy drink
since MB < MC
(1.5 < 2)
Note that we are NOT
maximizing average
benefit or total benefit
Surplus
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# of drinks
Total benefit ($)
0
0
MB ($)
Avg. benefit
N/A
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Economics surplus is
benefit minus cost
Marginal surplus
5
1
5
5
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4
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3
2
8
2.5
3
10.5
1.5
4
12
3
-1
5
11
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3.5
2.2
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1st unit: 5 – 2 = 3
2nd unit: 3 – 2 = 1
3rd unit: 2.5 – 2 = .5
Total surplus for
consuming 3 units:
$4.50
Thinking like an economist:
MB/MC and grades
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Your choices over the next 10 weeks
will help determine the grade you get in
this class
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“Should I choose to spend a lot of time
studying and try to get a good grade?”
“Should I choose to sleep in and miss
lecture?”
Choices like these will help determine
your grade
Working with graphs
Working with graphs
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Some reminders of
graphs
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Label axes
Label curves
Label dollar
amounts, quantities,
etc., when needed
Working with graphs: Slope
Supply:
Slope is rise
(red line)
divided run
(green line), or
6 divided by 4,
which is 1.5
here
Working with graphs:
Equations of lines
Demand:
y = mx + b
m is slope (-1)
b is y-int. (10)
y = -x + 10