Making Decisions

Marginal analysis: - How to choose the quantity we consume. Like last lecture, how many coconuts we are willing to give the fish. What point on the PPF do we want to go to? - Guiding question: Marginal Cost and Marginal Benefit difference, and how we use these things to do marginal analysis. How marginal analysis affects decision making process - - - Lecture #2 Marginal cost: additional cost incurred by doing one more unity of that activity How does my cost change from doing one more unit, essentially These costs can be either in consuming or producing Like buying pizza costs money, cost of one pizza slice is the marginal cost. But marginal cost could be how much more the pizza makes your stomach hurt. If one slice costs $2 and two slices cost $3.75 together, marginal cost of second slice is $1.75. If you choose the easiest thing first and go onto to harder, for example, marginal cost for each additional unit gets higher and higher. Most times there is increasing marginal cost If it is decreasing, well it can. There is specious logic just for simplicity's sake. If first unit was worth it and marginal cost is decreasing, you will continue to produce beyond those units until marginal cost begins to increase Using halfway point for each bar. It’s increasing here. Marginal, think derivative. Add up the y axis points all together and you’ll get total cost for 7 lawns mowed Lecture #5 Additional benefit derived from undertaking one more unit of that activity. Or how does total benefit change with one more unit? - - - This is an approximation, at the .5 on the graph Everytime we do an additional unit, we get less and less benefit Everytime you buy a piece of pizza, marginal benefit goes down cuz you get less and less hungry for example. Less benefit for mowing each lawn: unique price for each household and goes to the biggest yard first Or he was only mowing one lawn at $35, wants to earn more so he goes to two lawns a week but the other household is only willing to pay $32.50. So he gets a total of $65 cuz he charges that price to first household as well Since he had to in total lower prices by $5, marginal benefit of second lawn is 35-5=$30 cuz it negatively affects first lawn Lecture #6 Graphing the same really as MC - Lecture #7 Optimal quantity: level that generates maximum possible total net gain Principle of marginal analysis: the optimal quantity of an activity is the quantity at which marginal benefit is equal to marginal cost Total net gain= total benefit - total cost Therefore, the highest net gain is when marginal benefit - marginal cost = 0 when marginal benefit is coming down and marginal cost is coming up to meet Doesn’t say where total net gain is in above equation - He should cut five lawns. - - - Can all do this graphically and see where two lines intersect Area under graph= total gain Lecture #8 - - If equal, we are at optimum quantity When you reach for a 5th banana, you think if getting a 6th is worth it. If MB>Mc then yes, if MB< MC then no. Most likely MB=MC at that point. On graph: MC is upsloping, MB is downsloping