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econ 211 lecture 2

econ 211 lecture 2 - Economics 211 Lecture 2 Patrick...

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Economics 211 Lecture 2 Patrick McLaughlin Recall the six assertions about individual behavior: 1. Infinite desire. 2. Infinite scarcity. 3. Substitution. 4. Principle of diminishing marginal returns. 5. No accounting for taste. 6. Consistent rationality. There remains one essential principle: 7. Principle of Increasing Marginal Cost The principle of increasing marginal cost states that as an agent (individual or firm) increases production of a good, the marginal cost of producing each additional unit will eventually start to increase. I illustrated this with the GPA vs. Fun example in the last lecture: increasing your GPA got more and more costly in terms of the amount of Fun you had to give up; similarly, increasing the amount of fun was increasingly costly as more and more fun was produced. Tradeoffs To further illustrate that all choices entail costs as well as the principle of diminishing marginal benefit, consider a choice that all students must make: get better grades or have fun. Let’s suppose that in order to do one you must give up some of the other. Furthermore, suppose that the marginal benefit of each diminishes as you do more of the activity. That is, the first hour per week of studying benefits you greatly in terms of effect on your GPA. The second hour benefits you as well, but not as much as the first. As you spend more and more time studying, the marginal benefit of each additional hour is lower: at some point, you’ve already learned the important stuff and you’re spending your time memorizing obscure dates in history and the number of words in the syllabus. Similarly, the first hour of fun you have benefits you significantly, and doesn’t cost much in terms of giving up GPA. But as you have more and more fun, the marginal benefit decreases and the cost to your GPA goes up. To simplify things, suppose you could produce the following combinations of GPA and fun (fun is measured in “kegs”): GPA and Fun (Total kegs per semester) 4.0 0 3.0 2.0 2.0 3.0 1.0 3.7 0.0 4 Page 1 of 5 Updated: 5/12/2009
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Economics 211 Lecture 2 Patrick McLaughlin Graph: available in class only Getting that first point of GPA doesn’t require much effort: you only have to give up 0.3 kegs of fun. All you have to do is show up for the midterm and final, and you can
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