• Review – opportunity cost• Review – optimizing behavior: private & (versus?)
public interest• Review – optimizing behavior: in levels & “at the
margin”• Introduction to Demand, Supply, Equilibrium
Econ 3120Fall 2016Xi Wang
Economics are all about Choice--All behavior are outcome of choices
Why did you choose to take this class?
Choices of whom? Economic agent, an individual or a group that is making decision.
You can be an economic agent; A hedge fund can be too!
Why do they need to choose? And How? Daddy, Why cannot I have all the candies? We always want more~~~~~Candies!!!! unlimited wants v.s limited resource
Since Resources are scarce Since they are scarce, we need to allocate
them in an efficient way? In what sense, are resources scarce? Allocation?Emm... Too Abstract. What are Economic Agents
doing?(Choose) Then How?
Consider the following example – your total benefits from consuming different quantities of gasoline each week can be expressed via this table.
Suppose the price of gasoline is $4/gallon. What is the net benefit of consuming
gasoline?◦ What is the optimal level of gasoline
consumption?
Gallons of gasoline per
week Total Benefit ($) Net Benefit ($)
Marginal Benefit
($/gallon)
0 0
1 8
2 15
3 21
4 26
5 30
6 33
7 35
8 36
Gallons of gasoline per
weekTotal Cost ($) Total Benefit ($) Net Benefit ($)
Marginal Benefit
($/gallon)
0 0 0 0
1 4 8 4
2 8 15 7
3 12 21 9
4 16 26 10
5 20 30 10
6 24 33 9
7 28 35 7
8 32 36 4
Same example – your total benefits from consuming different quantities of gasoline each week can be expressed via this table (handout).
Suppose the price of gasoline is $4/gallon. Can you show that 5 gallons (per week) is
the optimal quantity via the principle of optimization “at the margin”?
Gallons of gasoline per
week Total Benefit ($) Net Benefit ($)
Marginal Benefit
($/gallon)
0 0 ---
1 8 8
2 15 7
3 21 6
4 26 5
5 30 4
6 33 3
7 35 2
8 36 1
Gallons of gasoline per
week Total Benefit ($) Net Benefit ($)
Marginal Benefit
($/gallon)
Marginal Cost ($/gallon)
0 0 --- ---
1 8 8 4
2 15 7 4
3 21 6 4
4 26 5 4
5 30 4 4
6 33 3 4
7 35 2 4
8 36 1 4
Your friend Charles asks you to drive him to the airport. He says that he will reimburse you for the cost of going to the airport. It is a two-hour roundtrip to the airport, and you will use $15 of gas. If Charles pays for the cost of gas, has he paid your full cost of taking him to the airport?
Let's think deeper this time
What do I mean choose
Most of the time, in life, we only have single choice question!!!!
Opportunity Cost: the best alternative use of a resource(and we can try to assign a monetary value to it whenever possible)
When you choose to drink Pepsi, you will not drink Coca at that moment!!
It means what?
When you choose something, it means you abandon something else.
For example, Your time
You can spend your one hour and 15 mins in classroom and study, or spend them to work part time, or stay in classroom watching Youtube.
You can only choose one
Another example, You have a used car.
You can (1) sell it on Craglist for $ 1000 (2) give it to Jim as a gift (3) Do nothing! Keep it.
You have to make a choice, am I right?--- if you choose (2) the cost of this decision would be $1000---Opportunity cost
Single choice problem is another fundermental building block of Scarce Resource.
Think a about a senario: Uncle Azariadis gives you $2640 dollars as
a gift. (Limited Amount!) How would you like to spend this budget? For example: Small latee($4 each, 60
cups), Macro text book($150), Iphone 6+($600), Cal v.s Worrior ticket($1050), Round fly to San. Fran($400), Hotel ($200)
Same example – your total benefits from consuming different quantities of gasoline each week can be expressed via this table (handout).
Suppose a tax of $2/gallon is imposed (where the sellers remit the tax).
What is the optimal quantity of gasoline consumption per week?
Gallons of gasoline per
week Total Benefit ($) Net Benefit ($)
Marginal Benefit ($/unit)
0 0
1 8
2 15
3 21
4 26
5 30
6 33
7 35
8 36
Gallons of gasoline per
weekTotal Cost ($) Total Benefit ($) Net Benefit ($)
Marginal Benefit ($/unit)
Marginal Cost ($/unit)
0 0 0 0 --- ---
1 6 8 2 8 6
2 12 15 3 7 6
3 18 21 3 6 6
4 24 26 2 5 6
5 30 30 0 4 6
6 36 33 -3 3 6
7 42 35 -7 2 6
8 48 36 -12 1 6
In equilibrium, everyone is simultaneously optimizing, so no one would benefit by changing his/her behavior.
Results from Microeconomics: When a market is perfectly competitive, agents’ individual optimizing behaviors result in the equilibrium outcome being ‘best’ from society’s point of view
Apartment Commuting time
Rent cost
Very Close 5 H $ 1180
Close 10 H $ 1090
Far 15 H $ 1030
Very Far 20 H $ 1000
Apartment Commuting time
Rent cost Commuting Cost
Total Cost
Very Close 5 H $ 1180 $ 50 $ 1230
Close 10 H $ 1090 $ 100 $ 1190
Far 15 H $ 1030 $ 150 $ 1180
Very Far 20 H $ 1000 $ 200 $ 1200
Hourly Wage(Opportunity cost): $10/H
Apartment Commuting cost
Marginal Commuting cost
Rent cost Marginal Rent cost
Total cost Marginal cost
very close 50 1180 1230
50 -90 -40
close 100 1090 1190
50 -60 -10
far 150 1030 1180
50 -30 20
very far 200 1000 1200
Optimization, Choose the best feasible option
We are all making our optimal decision
We use data to test theories, insead of experiment. Too abstract, right?- Next Lecture
Economics is the study of how agents choose to allocate scarce resources and how those choices affect our society
Positive: What are you doing; Help us to understand the world; Like Science!
Normative: What shall we do? Oops! This would be a little subjective.
TextBook: Page 2-16
TextBook: Page 42-48, 50-52
