ARE$201,$Fall$2013$–$Giguere$ $ Instructor$Notes$&$Worksheet$Solutions$$$1$2_INTRODUCTION$$RELEVANT/READING:$Syllabus$Hyman$Chapter$1,$Economics:$What$It’s$All$About$$LEARNING/OBJECTIVES:$1. Read$the$syllabus$and$understand$roles,$responsibilities,$class$policies,$important$dates,$etc.$$$2. Understand$the$concepts$of$scarcity$and$opportunity$cost.$$3. Explain$rational(behavior$and$marginal(analysis,$a$method$of$analyzing$the$way$we$make$decisions.$$$$ARE$201,$Fall$2013$–$Giguere$ $ Instructor$Notes$&$Worksheet$Solutions$$$2$“Economics/is/the/social/science/that/examines/how/people/choose/to/use/scarce/resources/in/attempting/to/satisfy/unlimited/wants.”/$$Scarcity$–$unlimited$wants$and$limited$resources$$$ $$ Means$that$we$face$trade$offs$$$Examples$of$resources:$labor,$capital,$land,$entrepreneurship,$time$$$ $$ Garbage$is$not$scarce$unless$you$want$more$of$it$than$is$available.$$$When$you$wake$up$in$the$morning$you$need$to$decide$how$to$allocate$your$day.$When$you$choose$to$use$your$time$to$do$one$thing,$you$are$giving$up$the$ability$to$be$able$to$use$your$time$to$do$something$else.$For$example,$by$coming$to$class$you$are$not$raging$with$your$friends$and$hopefully$you$aren’t$sleeping$in$class.$$$$Opportunity/Cost$–$the$highestQvalued$alternative$that$must$be$given$up$to$engage$in$an$activity$$$What$was$your$opportunity$cost$of$coming$to$class$today?$$$$Suppose$you$take$your$savings$out$of$the$bank$to$start$a$business.$When$you$take$money$out$of$the$bank$what$are$you$giving$up?$$$$Consider$some$costs$of$attending$college:$$ Tuition$&$books$$ Room$&$board$$ Entertainment/$spending$money$$ Transportation$$$ Which$of$those$costs$would$you$still$have$to$incur$if$you$were$not$in$college?$$$$$$$$ARE$201,$Fall$2013$–$Giguere$ $ Instructor$Notes$&$Worksheet$Solutions$$$3$Who$can$eat$an$entire$pizza$by$themselves?$$$$$$$$$$$$$$$$$/Marginal/–/the$next$or$extra$$$Marginal/benefit$–$the$additional$benefit$from$one$more$unit$(MB)$$$In$many$economic$situations$the$marginal$benefit$is$known$as$the$marginal$revenue$(MR)$$$Marginal/cost$–$the$additional$cost$from$one$more$unit$(MC)$$$Marginal/analysis$–$comparing$MB$to$MC$$$$ Economists$reason$that$the$optimal$decision$is$to$continue$any$activity$up$to$the$point$where$MB$=$MC.$A$rational$individual$will$never$undertake$an$activity$if$MC$>$MB.$$$$$ The$profit$maximizing$quantity$of$output$for$firms$is$found$where$MR$=$MC.$You$cannot$increase$profit$by$selling$an$additional$unit$for$less$than$it$costs$to$produce$it.$$$$$Rational/behavior/–/choosing$an$action$only$if$benefits$outweigh$the$costs$/ /$Example:/Cases$of$beer$cost$$15$each.$How$many$cases$of$beer$will$a$rational$individual$choose$to$buy?$Hint:$As$many$as$he$or$she$can$afford$may$be$the$correct$real$life$answer,$but$it$is$not$the$answer$in$economics$classes.$$Happiness$/$Sadness$#$of$slices$MB/MC/ARE$201,$Fall$2013$–$Giguere$ $ Instructor$Notes$&$Worksheet$Solutions$$$4$$#/of/cases/of/beer/Marginal/Benefit/Marginal/Cost/Net/Gain/1$$30$$15$$15$2$$25$$15$$10$3$$$18$$15$$3$4$$10$$15$Q$5$5$$5$$15$Q$10$$$$GPA/Example:/$Exam/#/Marginal/Grade/Average/Grade/0$QQQQQQQQQQ$QQQQQQQQQQ$1$60$60/2$70$65/3$80$70/4$100$77.5/5$80$78/6$40$71.6/$$$ $$$$$$$$$$$$$$$$$$$If$your$marginal$grades$are$lower$than$your$average$grade,$your$average$grade$will$fall.$$If$your$marginal$grades$are$higher$than$your$average$grade,$your$average$grade$will$rise.$$Grade$Assignments$Marginal/Average/ARE$201,$Fall$2013$–$Giguere$ $ Instructor$Notes$&$Worksheet$Solutions$$$5$If$your$marginal$grade$is$equal$to$your$average$grade,$your$average$grade$will$not$change.$$Same$thing$applies$with$costs$of$production$$$$$$$$$$$$$$$$$$$$$Cost$Output$Marginal/Average/ARE$201,$Fall$2013$–$Giguere$ $ Instructor$Notes$&$Worksheet$Solutions$$$6$2_REVIEW/QUESTIONS$$1.$Economics$say$that$a$thing$is$scarce$when:$$ A.$Only$a$finite$amount$exists$$ B.$There$is$at$least$one$use$for$the$thing$$ C./The/amount/available/is/less/than/what/people/would/like/to/have/$ D.$The$amount$of$the$item$available$is$finite$and$decreasing$$2.$Why$are$room$and$board$not$an$opportunity$cost$of$college?$$ A.$Because$my$parents$pay$for$it$$$ B.$Because$its$already$included$in$tuition$C./Because/even/if/I/weren’t/in/college/I’d/still/have/to/have/a/place/to/live/and/food/to/eat/$ D.$Opportunity$cost,$shmopportunity$cost,$blah,$blah,$blah,$economics$$3.$Why$don’t$all$people$have$top$of$the$line$security$systems$in$their$homes$to$deter$theft?$$$ A.$People$are$stupid,$duh.$$$ B.$Top$of$the$line$security$systems$are$not$available$for$residential$use$$ C.$Home$burglaries$are$on$the$decline$so$its$stupid$to$try$to$deter$these$crimes$D./The/marginal/benefit/of/installing/the/system/does/not/outweigh/the/marginal/cost/$4.$If$the$value$you$place$on$college$basketball$tickets$is$$100$and$you$can$purchase$tickets$to$any$of$NC$State’s$basketball$games$at$$35,$how$many$tickets$per$game$do$you$buy$assuming$you’re$rational?$$ A.$You’d$buy$as$many$as$you$could$with$all$the$money$in$your$bank$account$$ B./You/would/buy/2/tickets/per/game/$ C.$You$would$buy$3$tickets$per$game$$5.$What$is$the$correct$amount$of$time$to$spend$answering$this$question?$$$