DO YOU THINK LIKE
AN ECONOMIST?
ANYTHING WORTH DOING
IS NOT NECESSARILY
WORTH DOING WELL
Marginal
Analysis
AP Micro
WHOSE WISDOM BEST FITS TODAY’S
WORLD?
Always take the short cut; and that is
the rational one. Therefore say and do
everything according to soundest
reason.
Meditations iv.51
Marcus Aurelius , A.D. 120 to 181
Whatever is worth doing at all is worth
doing well.
Philip Dormer Stanhope
Earl of Chesterfield, 1694 to 1773
SHOULD YOU DO ALL
YOU CAN TO EARN A
PERFECT GRADE OF 100
ON YOUR NEXT
ECONOMICS EXAM?
UNTIL THE LAST UNIT EQUALS…
DIRECTIONS
Please read Introduction to MARGINAL
ANALYSIS
Identify definitions for
Marginal analysis
Marginal cost
Marginal benefit
Write your own example of a choice you
made “at the margin.”
How about an example of a business
decision made at the margin? Government?
HOMEWORK? REALLY?
# of Hires
1
2
Total
Benefits
(TB)
$100
$200
3
$270
4
5
$330
$382
6
$420
7
$450
8
$460
9
$460
10
$455
Marginal
Benefits
(MB)
$100
Marginal
MB - MC
Cost (MC)
-$5
$50
-$55
Marginal Decision Rule
MC = MB
Continue
choosing
until the
marginal
costs are
equal to
or greater
than the
marginal
benefits.
ESL VOCABULARY
Marginal utility
additional satisfaction
Diminishing marginal utility
in a given time period, consumers generally
receive less satisfaction from additional
(marginal) units of a good consumed
The more you consume of something, the less
you value one additional unit of it!
HOW CLEAN IS CLEAN ENOUGH?
ENVIRONMENTAL STATEMENTS
 Statement 1
 Local Lake is a disaster. It
was once a beautiful, clean
lake where you could drink
the water safely. Now it is
dirty from overuse, soil
runoff and overflow from
septic tanks. The County
Council should clean the
lake completely: 100%
clean. The technology and
know -how are available.
There is no excuse for not
doing the job completely.
 Statement 2
 We can clean up most of
the pollution in the lake for
one-third of what it would
cost to make it completely
clean. It may be too costly
to clean the lake
completely. Resources are
scarce. If the County
Council overspends for the
environment, it can
accomplish less in other
areas that are important,
too.
DISCUSSION QUESTIONS
Identify the marginal benefits and
marginal costs in this activity.
What is the opportunity cost?
Since the marginal benefits decreased,
might there be a time when the MC of
cleaning were greater than the MB?
DOLLAR-AUCTION EXPERIMENT
You are about to participate in an ascending -price,
oral auction for a one-dollar bill. The person with
the highest bid will win the dollar and pay the
amount of his/her final bid. Only the highest bidder
receives the dollar.
The opening bid starts at 25 cents and all bids from
there must be given in minimum 5-cent increments.
When all the bidding stops, the auctioneer will give
the dollar bill to the highest bidder for the amount
bid. The person with the second-highest bid will pay
the auctioneer his/her highest bid but will not
receive the dollar.
POST AUCTION DISCUSSION
 Explain the logic in making a bid over $1
Do not
Do
Bid Up Bid Up
Costs
$0.95
Total
$0.95
MC of X
$0.95
$0.10
$1.05
$0.10
SUNK COST
There’s no use crying over spilled milk!
Costs that have been incurred that can’t
be recovered
A rational maximizer does not let sunk
costs influence one's decisions….
THE ONLY IMPORTANT COSTS ARE THE
ONES IN THE FUTURE!
DIAMONDS EXAMPLE
 Couple shopping for diamonds:
 No diamond
 ¼ carat diamond
 ½ carat diamond
 ¾ carat diamond
 10 carat diamond
$0
$1,000
$1,500
$2,250
$220,000
 Which to choose?
 Evaluate marginal benefit to marginal
cost
 Can there be too much of a good
thing?
A FINAL QUESTION
Use the economic perspective to explain
why someone who is normally a light
eater at a standard restaurant may
become somewhat of a glutton at a
buffet-style restaurant that charges a
single price for all you can eat.