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Unformatted text preview: Chapter 1 Marginals, Totals and Averages Motivation. From time to time you might see a sticker that says Economists do it at the margin. Only economists understand that this is a rather pathetic joke. Nonetheless, the statement is true, as you will see. There are three related ideas in economics that you must understand; marginal, totals and averages. They are easy ideas, but for some reason a lot of people are careless and wind up with less than a clear understanding of them. Believe it - these simple ideas are worth your careful attention. Understand not just the ideas but how they are related to each other (thats easy too) and your studies of microeconomics will be off to a great start. The three ideas get used repeatedly throughout the course. Marginals. Anyone studying economics almost immediately encounters things with names that start with the word marginal. During the course you will encounter marginal productivities, marginal production costs, marginal utilities, marginal rev- enues and so on. Websters Encyclopedic Unabridged Dictionary lists six meanings of the word marginal. One of them is stated as being an economic term that means of or pertaining to goods produced and marketed at margin, a definition that is less than helpful. All you need to do is realize that when an economist uses the word marginal he or she just means extra. So, memorize it; marginal = extra . To be a little more precise, a marginal something in economics is the extra quantity of that something caused by exactly one extra unit of something else. For example, a firms marginal production cost is the extra production cost caused by producing exactly one extra unit of its product. And a marginal product(ion) of labor is the extra production caused by using one extra labor unit. Get the idea? Here is an example. Suppose you have five chairs that you have made in your workshop. You have taken these chairs to the local Saturday market to sell. People come by where you are standing and haggle with you over the price of a chair. After a while you sell your first chair for $35. A little while later you sell the second chair for $42, and then a bit later you sell the third chair for $31, then the fourth for $27 1 2 CHAPTER 1. MARGINALS, TOTALS AND AVERAGES and just before the market ends you sell the fifth chair for $23. How did your revenue ( i.e. the money paid to you by your customers) change as you sold off your chairs? At the outset, when no chairs had been sold, your revenue was $0. When you sold your first chair your revenue rose from $0 to $35, so the extra revenue caused by selling the first (individual) chair is $35. An economist would then say that $35 is the marginal revenue of the first chair. When you sold your second chair your revenue increased by $42, from $35 to $77, so the extra revenue caused by selling the second (individual) chair is $42; i.e. the marginal revenue of the second chair is $42. Lets continue. When the third chair was sold your revenue increased by $31, from $77 tocontinue....
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- Spring '08