1. Econ 100 Survey of Micro and Macroeconomics Lecture #1.1 1-06-2009 Economics as a Marginalist Paradigm

2. 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]

3. A Numeric Example From Alchian and Allen # Tees produced daily Total CostsMarginal 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

4. A Numeric Example What Are the Marginal Costs # Tees produced daily Total CostsMarginal 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

5. All of the Numbers # tees/dayTotal CostMarg CostTotal RevMarg RevProfitMarg Profit 0$1.00 $0.00 -$1.00 1$1.50$0.50$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 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

6. 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

7. 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

8. 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

9. A Demand Example PriceQty Demanded $10.001 $9.002 $8.003 $7.004 $6.005 $5.006 $4.007 $3.008 $2.009 $1.0010

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

11. Computing Marginal Value PriceQty Demanded $10.001 $9.002 $8.003 $7.004 $6.005 $5.006 $4.007 $3.008 $2.009 $1.0010

12. Total and Marginal Value PriceQty DemandedAmt PaidMarginal ValueTotal Value $10.001 $9.002$18.00$9.00$19.00 $8.003$24.00$8.00$27.00 $7.004$28.00$7.00$34.00 $6.005$30.00$6.00$40.00 $5.006$30.00$5.00$45.00 $4.007$28.00$4.00$49.00 $3.008$24.00$3.00$52.00 $2.009$18.00$2.00$54.00 $1.0010$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

13. In Graphic Terms Note: (again) price = marginal value Consumer is willing to buy up to P = MV

14. 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

15. 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