:
o
i
r
a
n
e
c
s
GIVEN THE FOLLOWING,
MAKE A RATIONAL CHOICE
BASED ON YOUR OWN
INCENTIVES
1. You want to visit your friend for the weekend.
2. You work every weekday, earning $100 per day.
3. You have three flights to choose from:
AY
D
S
R
THU
t
h
g
i
N
0
0
3
$
AY
D
I
FR
g
n
i
n
or
M
5
4
3
$
WHICH FLIGHT SHOULD
YOU CHOOSE, AND
WHY?
AY
D
I
FR
t
Nigh
0
8
3
$
UNIT 1 . 2
ECONOMIC PARTICIPANTS
AND MARGINAL ANALYSIS
ECONOMIC PARTICIPANTS
CONSUMERS
In
have an incentive to
ECONOMICS
the key participants make
RATIONAL CHOICEs
based on their own
INCENTIVES
MAXIMIZE UTILITY
FIRMS
have an incentive to
MAXIMIZE PROFIT
GOVERNMENT
has an incentive to
MAXIMIZE
GENERAL WELFARE
ECONOMIC PARTICIPANTS
CONSUMERS
GOVERNMENT
MAXIMIZE UTILITY
MAXIMIZE
GENERAL WELFARE
has an incentive to
have an incentive to
FIRMS
have an incentive to
MAXIMIZE PROFIT
?
T
L
U
RES
GUARANTEED
IT’S
THAT EACH WILL MAKE A DECISION BASED
ON THEIR INCENTIVE, MAKING ACTIONS VERY
!
PREDICTABLE
ECONOMIC PARTICIPANTS
:
t
i
t
u
bo
a
k
n
i
h
t
AS A CONSUMER
AS A FIRM
would McDonald’s make every item
on their menu twice as healthy at
twice the cost because they care
about their customers?
would you continue to pay the market
price for a pair of Rainbows sandals if
they fell apart after one month?
TERMS
NEEDS
WANTS
A basic requirement for survival
without which you cannot live
Something you desire that is
unnecessary for survival
The satisfaction of needs and wants is called
UTILITY
GOODS
SERVICES
Physical objects that satisfy
needs and wants
Actions or activities that satisfy
needs and wants
AKA
ECONOMIC GOODS
INPUTS
OUTPUT
The resources used by firms to
produce products
The finished goods/services
produced by firms for profit
AKA
FACTORS
AKA
TERMS
PRODUCTS
WAGES
PRICES
The price paid by firms to purchase
inputs or factors of production
The income spent by consumers
to purchase economic goods
TERMS
COSTS
REVENUE
The combined wages paid by a
firm to produce economic goods
The price paid to the firm per unit
of output sold (Price x Quantity)
Firms seek to minimize cost and increase revenue to
MAXIMIZE PROFITS
PROFIT
INCOME
Revenue kept by firms after
paying off costs of production
Wages kept by consumers that
are used to buy products
The greater the income earned, the greater the chance to
MAXIMIZE UTILITY
MARGINAL ANALYSIS
COST - BENEFIT
Decisions
Every decision made by each of the participants is driven by analysis of the
MARGINAL BENEFIT gained and the MARGINAL COST of the decision
MAR
the marginal benefits
“EACH
CO
S
R
E
NSUM LITY
ginal
r
a
M
UTI
S
M
R
I
F REVENUE
ginal
r
a
M
GINA
L ME
ANS
ADDIT
IO
NAL”
GO
T
T
I
N
F
E
E
N
M
E
B
N
L
R
A
E
I
C
V
ginal
r
a
M
SO
MARGINAL ANALYSIS
COST - BENEFIT
Decisions
Every decision made by each of the participants is driven by analysis of the
MARGINAL BENEFIT gained and the MARGINAL COST of the decision
the marginal costs
EXPLICIT COSTS
Easily accounted costs transacted in monetary form
AKA “OUT OF POCKET” COSTS
implicit costs
The opportunity costs, or forgone benefits, of a decision that are
in non-monetary form
MAR
“EACH
GINA
L ME
ANS
ADDIT
IO
NAL”
IN
ECONOMICS
THEY’RE CONSIDERED
TOGETHER AS
ECONOMIC COSTS
Let’s
!
E
T
A
L
U
M
SI
As a
# OF CUPS OF
STARBUCKS COFFEE
BENEFIT
COST
1ST
$10
$4
2ND
$5
$4
3RD
$2
$4
TOTAL
$17
$12
CONSUMER , how many cups of Starbucks coffee will you buy?
Let’s
!
E
T
A
L
U
M
SI
As a
# OF CUPS OF
STARBUCKS COFFEE
BENEFIT
COST
MARGINAL BENEFIT
1ST
$10
$4
+$6
2ND
$5
$4
+$1
3RD
$2
$4
-$2 X
TOTAL
$17
$12
N/A
CONSUMER , how many cups of Starbucks coffee will you buy?
2
cups
# OF HONDA CARS
REVENUE
COST
1
2
3
4
5
6
TOTAL
$27,000
$25,000
$22,000
$18,000
$13,000
$7000
$112,000
$10,000
$7000
$11,000
$18,000
$28,000
$40,000
$114,000
As a
FIRM , how many cars should Honda produce?
# OF HONDA CARS
REVENUE
COST
1
2
3
4
5
6
TOTAL
$27,000
$25,000
$22,000
$18,000
$13,000
$7000
$112,000
$10,000
$7000
$11,000
$18,000
$28,000
$40,000
$114,000
As a
MARGINAL BENEFIT
+$17,000
+$18,000
+$11,000
$0
-$15,000 X
-$33,000X
N/A
FIRM , how many cars should Honda produce?
4
cars
# OF FIRE STATIONS
1
2
3
4
5
6
TOTAL
As a
SOCIAL BENEFIT SOCIAL COST
$250,000
$215,000
$165,000
$105,000
$35,600
$714
$771,314
$1000
$2500
$6000
$10,250
$24,014
$52,000
$95,764
GOVERNMENT , how many fires stations should the city of
Yorba Linda build?
# OF FIRE STATIONS
1
2
3
4
5
6
TOTAL
As a
SOCIAL BENEFIT SOCIAL COST
$250,000
$215,000
$165,000
$105,000
$35,600
$714
$771,314
$1000
$2500
$6000
$10,250
$24,014
$52,000
$95,764
MARGINAL SOCIAL
BENEFIT
+$249,000
+$212,500
+$159,000
+$94,750
+$11,586
-$51,286 X
N/A
GOVERNMENT , how many fires stations should the city of
Yorba Linda build?
5
stations
COST - BENEFIT
Decisions
S
T
S
O
C
T
I
C
I
L
P
M
I
&
T
I
C
I
EXPL
RYAN
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T
A
V
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R
P
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N
I
V
OF SA