Download Ind. Decisions involve trade-offs and thinking on the margin and

Ind. Decisions involve trade-offs
and thinking on the margin and
responding to incentives
Marginal Thinking
Marginal Utility- measure of satisfaction
Marginal Cost- measure of increasing cost
When MB>MC
keep going
Marginal Benefit- measure of increasing benefit
When MB =MC
stop
MC=MB- increased cost equals the increased benefit (Equilibrium)
When MB < MC You’ve gone too far
http://www.youtube.com/watch?v=y8gt_1beAmw
The Law of Diminishing Marginal Benefits
As a person increases consumption of a product
While keeping consumption of other products constant
There is a decline in the marginal utility that person derives from
consuming each additional unit of that product.
Listen for words to give you clues
about Adam’s utility
Fig. A
Bites of Ice Cream
Examples- great, good, fine, ok,
Horrible, etc.
Utility
Wonderful
Ok
Horrible
Also listen for words to give you clues
about how many bites Adam has
taken, assume 1 bite per minute.
Examples- you’re ½ way done, You’re
10 minutes in, after the first couple of
bites, etc.
10
As a starting point, After Adam’s first
bite he claimed that it was wonderful.
5
1
10
20
30
40
50
60
Bites
At some point the marginal benefit of each bite was exceeded
by the marginal costs.
For Adam the marginal benefit of completing the challenge on
T.V. has to factor in, but for most people we stop when he have
had enough.
MC and MB of the average person has an impact on the price.
9
Whole pie $11.60
8 slices
1 slice - $1.45
Why?
Slice= $2.00
Profit Maximization
The Price of each widget $2.00, each worker is paid $8.00
TR
TC
cv
TP
0
0cv
0
$10
$8
$2
$30
$16
cv
cv
$24
cv
$14
$52
$32
cv
$20
$56
$40
$16
$44
$48
$4
$44
6
24 widgets
How many workers should this firm employ?
When do total profits start to drop?
$8.00
$20
The Price of each widget $2.00, each worker is paid $8.00
6
24 widgets
7 units
$14.00
4 units
$8.00
2 units
$4.00
-4 units
- $ 8.00
How many workers should this firm employ?
When do total profits start to drop?
TR
TC
cv
TP
0
0cv
0
$10
$8
cv
$2
$30
$16
cv
cv
$24
cv
$14
$52
$32
cv
$20
$56
$40
$16
$44
$48
$4
$44
$8.00
$20
Price
Fig. B
$22
$20
$18
$16
$14
$12
$10
MC
$8
$6
$4
$2
1
2
3
4
5
6
Workers
Price
$22
$20
$18
Increasing
marginal
returns
$16
specialization
$14
0
Diminishing
marginal
returns
$12
$10
Equilibrium
MR=MC
$8
MCR
$6
loss
$4
$2
MRP
1
2
3
4
5
6
Workers
The Push-up Machine
Firms have to pay for resources and for a firm to make a profit from an added input, the marginal revenue must exceed the additional cost.
Marginal Revenue Product (MRP) > Marginal Resource Cost
MRP = MCR
MRP < MCR
keep going
stop hiring
Too much
I have created a machine that can convert human push-ups into electricity. Since push-ups necessitate some strength but relatively little skill I
will pay each person $8.00.
Each round will be 20 seconds long and for every push –up I receive $1.00.
My factory is 6 feet by 5 feet and represents fixed resource.
How many people should I hire?
Price per push up = $1.00
Workers
0
Total Production
0
Marginal Product (MP)
MRP = MP (P)
0
0
MRC
0
1
8
2
8
3
8
4
8
5
8
6
8
7
8
The Rice
Field 3 x 4 feet
1 piece of chalk
Price per unit of Rice = $1.00
Wage = $8.00
Workers
0
Total Production
0
Marginal Product (MP)
MRP = MP (P)
0
0
MRC
0
1
8
2
8
3
8
4
8
5
8
6
8
7
8
The Push-up Machine
Firms have to pay for resources and for a firm to make a profit from an added input, the marginal revenue must exceed the additional cost.
Marginal Revenue Product (MRP) > Marginal Resource Cost
MRP = MCR
MRP < MCR
keep going
stop hiring
Too much
I have created a machine that can convert human push-ups into electricity. Since push-ups necessitate some strength but relatively little skill I
will pay each person $8.00.
Each round will be 20 seconds long and for every push –up I receive $1.00.
My factory is 6 feet by 5 feet and represents fixed resource.
How many people should I hire?
Price per push up = $1.00
Workers
0
Total Production
0
Marginal Product (MP)
MRP = MP (P)
0
0
MRC
0
1
8
2
8
3
8
4
8
5
6
7
The Push-up Machine
Firms have to pay for resources and for a firm to make a profit from an added input, the marginal revenue must exceed the additional cost.
Marginal Revenue Product (MRP) > Marginal Resource Cost
MRP = MCR
MRP < MCR
keep going
stop hiring
Too much
I have created a machine that can convert human push-ups into electricity. Since push-ups necessitate some strength but relatively little skill I
will pay each person $8.00.
Each round will be 20 seconds long and for every push –up I receive $1.00.
My factory is 6 feet by 5 feet and represents fixed resource.
How many people should I hire?
Price per push up = $1.00
Workers
0
Total Production
0
Marginal Product (MP)
MRP = MP (P)
0
0
MRC
0
1
8
2
8
3
8
4
8
5
6
7
1.
Who should be the last worker hired? Why?
2.
If we hired too many workers who should be the first we let go? Why?
3.
Should the government protect workers who are unproductive? Why or why not?
4.
What would happen if the government raised the min. wage to $10.00 an hour? Apply the law of demand. Price and Quantity demanded have an inverse
relationship.
5.
Chart MRP and MRC. I already did the MRC
Price
$25.00
$20.00
$15.00
$10.00
$8.00
MCR
1
2
3
4
5
6
7
8
9
10
Quantity
1. Who should be the last worker hired? Why?
2. If we hired too many workers who should be the first we let go?
Why?
3. Should the government protect workers who are unproductive?
Why or why not?
4. Should the protect government specific types of workers? Old age?
Injured? Others?
5. What would happen if the government raised the min. wage to
$15.00 an hour? Apply the law of demand. Price and Quantity
demanded have an inverse relationship.
6. What else can the government to impact my marginal product?
7. Graph MRP and MRC. I already did the MRC
Diminishing marginal Returns
occur when new resources are
added to fixed resources
The points outside are
unexplainable but just as real.
Economics isn’t about charting
numbers, graphing a line, or
laws.
Its about human action and
behavior.
The Push-up Machine
Firms have to pay for resources and for a firm to make a profit from an added input, the marginal revenue must exceed the additional cost.
Marginal Revenue Product (MRP) > Marginal Resource Cost
MRP = MCR
MRP < MCR
keep going
stop hiring
Too much
I have created a machine that can convert human push-ups into electricity. Since push-ups necessitate some strength but relatively little skill I
will pay each person $8.00.
Each round will be 20 seconds long and for every push –up I receive $1.00.
My factory is 6 feet by 5 feet and represents fixed resource.
How many people should I hire?
Price per push up = $1.00
Workers
Total Production
Marginal Product (MP)
MRP = MP (P)
MRC
0
1
18
18
18
2
43
25
25
8
3
66
23
23
8
4
83
17
17
8
5
105
22
22
8
6
109
4
4
8
7
8
Workers
0
1
2
3
4
5
6
7
Total Production
Marginal Product (MP)
MRP = MP (P)
MRC
Fig. A
Fig. B