Review of Last Class (5 Minutes)

1. Define “scarcity”2. What are the four factors of

production?3. What is the difference

between “labor” and “human capital”?

4. What is a trade-off?5. What is opportunity cost?

Micro vs. Macro Economics

MICROeconomics-Study of small economic units such as

individuals, firms, and industries (ex: supply and demand in specific markets, production costs, labor markets, etc.)

MACROeconomics-Study of the large economy as a whole

or economic aggregates (ex: economic growth, government spending, inflation, unemployment, international trade etc.)

Positive vs. Normative Economics

Positive Statements Based on facts. Avoids value

judgments (what is).

Normative Statements Includes Opinions (what I believe

ought to be).

Consumer Goods vs. Capital Goods

Consumer Goods – Products and services that directly satisfy human wants (Cheeseburger, Eye Exam).

Capital Goods – Goods that indirectly satisfy human wants in the future (factory, screwdriver).

Unit1: Marginal Analysis

Why do we make decisions?

Marginal analysis sounds complicated…it’s not!

Good news, you do it everyday, you just didn’t know what it was called.

Marginal Benefits vs. Marginal Cost

What does the word “marginal” mean in Economics?

ADDITIONAL

Every time we make a decision, we have to decide if the marginal benefits outweigh the marginal costs. We always make a decision if its marginal (additional) benefits outweigh its marginal costs.

Thinking at the Margin

How many times would you see the movie?

Notice that the total benefit is more than the total cost but you would

NOT watch the movie the 3rd time.

Utility

What is “utility”?

Utility: The amount of satisfaction you receive from consuming an additional unit or doing an additional activity

Utility = Benefits – Cost.

Utility

How many “utils” of enjoyment do you receive from watching 1 more/2 movies/3 movies?

Law of Diminishing Marginal Utility

As consumption increases, there is a decline in the marginal utility that a person derives from consuming each additional unit of that product.

Marginal Analysis Example:

You have been shopping at the mall for a half hour, the additional benefit of shopping for an additional half-hour might outweigh the additional cost (the opportunity cost).

After three hours, the additional benefit from staying an additional half-hour would likely be less than the additional cost.

Marginal Analysis Example:

Notice that the decision making process wasn’t “should I go to the mall for 3 hours or should I stay home”

In reality the decision making process started with “should I go to the mall at all.”

Once you are there you thought “should I stay for an additional half hour or should I go.”

You will continue to do something as long as its marginal benefits outweigh its marginal costs!!!

Who Wants a Chocolate Chip Cookie?