ECON 251 1st Edition Lecture 2 Outline of Last Lecture I. TermsII. ScarcityOutline of Current Lecture I. TermsII. Sunk CostIII. Marginal Benefit and Marginal CostIV. Absolute Advantage and Comparative AdvantageCurrent LectureI. TermsNormative: judgment kind of analysisPositive: factual kind of analysisOpportunity Cost: value of the best alternativeSunk Cost: irreversible cost; example: depreciationExplicit Cost: monetary costImplicit Cost: example: lost wages, time (relevant costs that you don’t specifically spend money onMarginal Benefit: benefit of an additional unit (MB)Marginal Cost: cost of an additional unit (MC)Absolute Advantage: a person/group of people who produce a product (or service) faster or in a larger quantity under the same circumstancesComparative Advantage: produce at the lowest costII. Sunk CostExample: you go to a restaurant and the hostess tells you that there is a 45 minute wait, and you decide to go ahead and wait. After the 45 minutes, the hostess says that it’s going to be another 30 minutes before a table opens up. You’re probably upset because if you knew thatit was going to be an hour and 15 minute wait, you would have left and gone somewhere else. But if you decide to leave and not wait the extra 30 minutes, then the 45 minutes that you already waited would be a sunk cost.**NOTE: you cannot include sunk costs as part of rational economic decisions.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.III. Marginal Benefit and Marginal CostHow to analyze with multiple quantities: compare the benefit with the cost for each unit (MB and MC).The MB declines as quantity increases (although it might increase initially), while the MC rises as quantity increases.IV. Absolute Advantage and Comparative AdvantageExample: Scott and Caroline can both complete two tasks: cleaning bathrooms and making beds.Scott’s and Caroline’s abilities are shown below (assuming Scott and Caroline can only do all of one task or the other):# of Baths cleaned per hour # of Beds made per hourScott 4 12Caroline 3 10Scott’s Costs: 4 baths cost 12 bedsOR the unit values:1 bathroom costs 3 beds1 bed made costs 1/3 of a bathroomCaroline’s Costs: 1 bathroom costs 3 1/3 beds1 bed costs 3/10 of a bathroomResults:- Scott has the absolute advantage in both cleaning bathrooms and making beds (he can make more beds and clean more bathrooms than Caroline)- Scott has the comparative advantage in cleaning bathrooms (he can clean bathrooms at a lower cost than Caroline)- Caroline has the comparative advantage in making beds (she can make beds at a lower cost than Scott)Rules of Comparative Advantage:1. If one person (or group of people) has comparative advantage in one task, the other person MUST have comparative advantage in the other task.2. No one can have comparative advantage in everything (even if they have the absolute advantage in