Econ 100 Survey of Micro and Macroeconomics

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Econ 100

Survey of Micro and
Macroeconomics

Lecture #1.1

1
-
06
-
2009

Economics as a
Marginalist

Paradigm

Marginal Costs


What do we mean by marginal costs?


incremental
,

or
additional
, costs of producing
one
more
unit of output


Difference in total costs of producing one more unit


Marginal cost of the 4
th

unit = Total Costs of the 4
th

unit minus
the Total Costs of the 3
rd

unit


MC[4] = TC[4]


TC[3]



A Numeric Example


From Alchian and Allen


# Tees produced
daily

Total Costs

Marginal Costs

0

$1.00

1

$1.90

2

$2.70

3

$3.40

4

$4.00

5

$4.70

6

$5.50

7

$6.40

8

$7.40

9

$8.60

A Numeric Example


What Are the Marginal Costs


# Tees produced
daily

Total Costs

Marginal Costs

0

$1.00

---

1

$1.90

$0.90

2

$2.70

$0.80

3

$3.40

$0.70

4

$4.00

$0.60

5

$4.70

$0.70

6

$5.50

$0.80

7

$6.40

$0.90

8

$7.40

$1.00

9

$8.60

$1.20

All of the Numbers

# tees/day

Total Cost

Marg Cost

Total Rev

Marg Rev

Profit

Marg Profit

0

$1.00

$1.00

$0.00

$0.00

-
$1.00

-
$1.00

1

$1.50

$0.50

$1.00

$1.00

-
$0.50

$0.50

2

$2.70

$1.20

$2.00

$1.00

-
$0.70

-
$0.20

3

$3.40

$0.70

$3.00

$1.00

-
$0.40

$0.30

4

$4.00

$0.60

$4.00

$1.00

$0.00

$0.40

5

$4.70

$0.70

$5.00

$1.00

$0.30

$0.30

6

$5.50

$0.80

$6.00

$1.00

$0.50

$0.20

7

$6.40

$0.90

$7.00

$1.00

$0.60

$0.10

8

$7.40

$1.00

$8.00

$1.00

$0.60

$0.00

9

$8.60

$1.20

$9.00

$1.00

$0.40

-
$0.20

What Do They Mean?

Total and Marginal Costs





Marginal and Total

Costs increasing at

Increasing rate

Marginal Costs at
Minimum, TC
increasing at dec rate

What’s It Mean to a Supplier?


Firm’s supply decision


Supply up to the point where p >= MC


Profit maximizing point


Profit Max

MR = MC

From the Demand Side


First Law of Demand


What Does
Law Of Demand

Mean?


all other factors being equal, as the price of
a good or service increases, consumer
demand for the good will decrease and vice
versa.



Investopedia explains
Law Of
Demand
...


summarizes the effect price changes on
consumer behavior. For example, a
consumer will purchase more pizzas if the
price of pizza falls. The opposite is true if
the price of pizza increases.


http://www.investopedia.com/terms/l/lawo
fdemand.asp

A Demand Example

Price

Qty Demanded

$10.00

1

$9.00

2

$8.00

3

$7.00

4

$6.00

5

$5.00

6

$4.00

7

$3.00

8

$2.00

9

$1.00

10

Consumer’s Marginal Value


Some basic definitions


Total Willingness
-
to
-
pay: “value in use”


How much would you be willing to pay for
x

units of the good than
go entirely without?


Equals the area under the demand curve up to
x

units

WTP for 4 units

Computing Marginal Value

Price

Qty Demanded

$10.00

1

$9.00

2

$8.00

3

$7.00

4

$6.00

5

$5.00

6

$4.00

7

$3.00

8

$2.00

9

$1.00

10

Total and Marginal Value

Price

Qty Demanded

Amt Paid

Marginal Value

Total Value

$10.00

1

$10.00

$10.00

$10.00

$9.00

2

$18.00

$9.00

$19.00

$8.00

3

$24.00

$8.00

$27.00

$7.00

4

$28.00

$7.00

$34.00

$6.00

5

$30.00

$6.00

$40.00

$5.00

6

$30.00

$5.00

$45.00

$4.00

7

$28.00

$4.00

$49.00

$3.00

8

$24.00

$3.00

$52.00

$2.00

9

$18.00

$2.00

$54.00

$1.00

10

$10.00

$1.00

$55.00

Price x Qty Dem

Area under Demand

Difference in

TV(3)
-
TV(2)

MV is also equal

to price paid

In Graphic Terms

Note: (again) price = marginal value


Consumer is willing to buy up to P = MV





What Have We Learned?


How to compute marginal or incremental
values


Marginal cost: the additional (change in Tot Costs)
of producing one more unit


Marginal value: the value to a consumer of
purchasing one more unit

The Bigger Lesson


Sell rule for firms


Firms will supply up to the point where the MC of
producing the next unit are just equal to the price it
receives for the good


First law of supply: supply curves will be upward sloping


Buy rule for consumers


Consumers will buy up to the point that price equals MV


First law of demand: demand curves are downward sloping


Negative slope


diminishing marginal value of consuming next
unit