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Do Now
Identify which of the ³8 Ways´ helps you to answer the following (youdo not have to actually answer the question itself):
1. The US has a trade deficit with China. Should we stop allinternational trade between our two nations?
2. GM is planning on building a factory in Gary, IN to make newCamaros. How many Camaros should they produce in thisfactory?
3. More and more people seem to be buying hybrid cars nowadays.Will that fact cause the price to go up or down?
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Agenda
1. Discuss Do Now (5 minutes)
2. Homework Review (5 minutes)
3. OBJ T5 (20 minutes)
4. OBJ T6 (10 minutes)
5. Birka (20 minutes)
6. OBJ T7 (20 minutes)
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T5 ± Define cost, opportunity cost, andbenefit.
We have thrown around terms so far such as ³cost´ and³benefit´. These are common words and their meaning ispretty clear. However, they have certain definitions ineconomics that help answer problems.
For instance, there are subtle differences between costand opportunity cost that economists are very particular about.
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T5 ± Define cost, opportunity cost, andbenefit.
Opportunity Cost: the cost of a choice that is ³passedover´ to make another choice.
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T5 ± Define cost, opportunity cost, andbenefit.
Scarcity means you have to make a choice between A andB. You can¶t have both.
Therefore, if you choose A, you don¶t get B. You had an
opportunity to choose B, but you didn¶t.
Therefore, the opportunity cost of A is B.
Notice, this is not cost in the sense that we normally think
about it in life. You are not paying for anything ³extra´.
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T5 ± Define cost, opportunity cost, andbenefit.
Example 1:
You have $15. You can either buy a CD or a t-shirt. The CDcosts $15. The t-shirt costs $15. You choose the CD.
Therefore, the opportunity cost of 1 CD is 1 t-shirt.
=
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T5 ± Define cost, opportunity cost, andbenefit.
Example 2:
You have $25. A video game is $50. A soccer ball is $25. You choose the video game. Therefore, the opportunity
cost of 1 video game is 2 soccer balls.
=
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T5 ± Define cost, opportunity cost, andbenefit.
Example 3:
You have $25. A video game is $50. A soccer ball is $25. You choose the soccer ball. Therefore, the opportunity
cost of 1 soccer ball is ½ a video game.
=
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T5 ± Define cost, opportunity cost, andbenefit.
Example 4:
You have 1 hour of free time. Your homework will take anhour. A round of CoD will take 30 minutes. You choose to
do your homework because you aren¶t lazy. Theopportunity cost of your doing your homework is 2rounds at CoD and«what else?
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T5 ± Define cost, opportunity cost, andbenefit.
Cost: the total ³sacrifice´ of involved in performing anactivity or obtaining a good or service.
This sacrifice includes more than just money (accounting
cost). It includes foregone time and resources.
Cost = Accounting Cost + Opportunity Cost
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T5 ± Define cost, opportunity cost, andbenefit.
Benefit: the value (either monetary or utility) you get frommaking a choice. It is considered to be the opposite of cost.
Note: Utility is ³enjoyment´ or ³satisfaction´ you get froma choice. We will get to utility theory later!
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T5 ± Define cost, opportunity cost, andbenefit.
Summarize!
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T6 ± Explain the concept of marginalism.
Looking at the ³8 Ways´ we mentioned marginalism. Itmeant ³one unit of change´ or ³the change that happensat the edge´.
Example Questions:What does it cost when I make one more unit of shoes?What do I get when I buy one more unit of video games?Does it benefit me to get one more unit of A and one lessof B? Does it cost me?
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T6 ± Explain the concept of marginalism.
Notice we are not examining the total. In really complexsituations this is not feasible. It would take forever.Therefore, we examine each individual choice we have tomake.
If each choice is a good one, then we make it, andtheoretically our overall total should be better for it.
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T6 ± Explain the concept of marginalism.
Example Situation: You collect rare coins. You have hundreds of them, andyou want your collection to be the best in Chicago.Someone offers you a 1949 misprint dime, but they want a
1931 all-copper penny from your collection as a trade.
When making this decision, you consider the value of thatsingle dime and decide if it is worth more to you than thepenny. If so, you make the trade and your collection is
worth more.
You do NOT need to total the value of your entire
collection to make the decision.
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T6 ± Explain the concept of marginalism.
To demonstrate this principle, we are going to play Birka!
Here are the basics:1. You get into a group of 4 (or 3). Everyone gets 13
cards.2. The only thing that matters in this game is the suit (not
the number/face value of the card).3. Your goal is to make trades, one at a time, to make
your hand the most valuable at the end of the game.
4. Each person makes a trade 2 times, and then the gameis over (twice around the circle).
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T6 ± Explain the concept of marginalism.
Premise: You are Vikings returning from pillaging anearby town. You bring back iron spades, heart shapedamulets, sparkling diamonds, and wooden clubs.
Rules:1. The first of every item is worth the most. Every item
after that adds value, but less. (See the scoring sheet.)2. During a ³buy´, you propose a trade. (You put out a
spade and ask for a club, for instance.)
3. If someone wants to make that trade, they put therequested card on the table and the deal is done.
4. If no one wants the trade, the buyer can either withdraw the trade or add another card to ³sweetenthe deal.´
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T6 ± Explain the concept of marginalism.
Rules (con¶t):5. Play continues to the left until all 4 players have made
2 trades (or trade proposals) each. This means twicearound the table.
6. Make sure to count the value of the table before andafter the game to compare later on.
7. The winner is the person with the highest valued handaccording to the scoresheet.
8. NO FIGHTING over whose card was down first.
Demerits for fighting. You aren¶t real Vikings. It¶s agame.
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T6 ± Explain the concept of marginalism.
Sample Game:
S outh is the first to
serve as buyer. S hehas a 6-4-2-2 hand (6
spades, 4 diamonds, 2
hearts, and 2 clubs)
which is worth 961
points. S he wants totrade a spade for a club
or heart.
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T6 ± Explain the concept of marginalism.
Sample Game:
S outh says, "I want a
club." S he then bids aspade by putting it in
the middle of the table.
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T6 ± Explain the concept of marginalism.
Sample Game:
W est quickly accepts
the trade by throwing
the requested club onthe spade. W est gives
up a fourth club (worth
10 points) but gains a
third spade (worth 25
points). S outh gives upa sixth spade (worth 4
points) but gains a third
club (worth 25 points).
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T6 ± Explain the concept of marginalism.
Sample Game:
T he role of buyer
rotates to W est, who
has a strong 4-4-3-3hand.
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T6 ± Explain the concept of marginalism.
Sample Game:
W est says "I want a
club and a spade" and
bids a heart by putting it in the middle of the
table. None of the other
players would benefit
from the trade, so
nobody accepts thebid. W est withdraws his
bid and the role of
buyer moves to North.
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T6 ± Explain the concept of marginalism.
Sample Game:
North would benefit by
trading a fifth spade
(worth 7 points) for athird heart (worth 25
points).
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T6 ± Explain the concept of marginalism.
Sample Game:
S o North says "I want a
heart" and bids a spade
by putting it in themiddle of the
table. East would
benefit from the trade
since he would give up
a sixth heart (worth 4 points) and gain a
fourth spade (worth 10
points).
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T6 ± Explain the concept of marginalism.
Sample Game:
But East doesn't accept
the bid, gambling that
North will sweeten it with another card. W hen
nobody accepts the
spade bid, North adds a
diamond to it.
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T6 ± Explain the concept of marginalism.
Sample Game:
East quickly responds
by slapping a heart on
the bid. Notice that W est also would have
benefited from the
trade, but he responded
too slowly.
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T6 ± Explain the concept of marginalism.
Sample Game:
It's East's turn to serve
as buyer. He
desperately needs aclub since he's short in
that suit.
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T6 ± Explain the concept of marginalism.
Sample Game:
East says "I want a
club," and bids a
heart. None of theothers respond to the
bid.
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T6 ± Explain the concept of marginalism.
Sample Game:
East therefore adds a
diamond to his
bid.S
outh would benefit slightly from the
trade, but doesn't
respond in hopes that
East will add another
card to his bid.
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T6 ± Explain the concept of marginalism.
Sample Game:
East adds another heart to
the bid and S outh accepts
the trade by putting a club
on top of the cards. East gained a second club (worth
70) but gave up a fourth and
fifth heart (worth 10 and 7
points) and a fifth diamond
(worth 7 points). S outh gave
up a third club (worth 25
points) but gained a third
and fourth heart (worth 25
and 10 points) and a fifth
diamond (worth 7 points).
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T6 ± Explain the concept of marginalism.
Sample Game:
T he role of buyer now goes
back to S outh, who will try to
trade away a spade and a
diamond for a club. None of the other players gain from
the trade, so it's
rejected. W est, North, and
East will also fail in their
attempts to trade. After East
passes, the hand is over.
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T6 ± Explain the concept of marginalism.
Sample Game:
S outh has a 5-5-4-2 hand, worth 999 points. W est has a 4-4-3-3
hand, worth 1,000. North has a 4-3-3-3 hand, worth 990 points,
and East has a 4-4-3-2 hand, worth 975. T he total value of the four
hands after trade is 999 + 1,000 + 990 + 975 = 3964. Recall that before trading began, S outh had a 6-4-2-2 hand worth 961, W est
had a 4-4-4-2 hand worth 985, North had a 5-4-3-2 hand worth 982,
and East had a 6-4-3-1 hand worth 916. T he total value of the
hands before trade was therefore 961 + 985 + 982 + 916 = 3844. By
trading, the Vikings increased their wealth by 3964 - 3844 = 120.
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T6 ± Explain the concept of marginalism.
While you are playing, consider:
How does this demonstrate marginalism?
What situations can you think of in life thatdemonstrate principles similar to this?
Why do you think value is added from the beginning toend of the game?
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T6 ± Explain the concept of marginalism.
Summarize!
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T7 ± Define marginal cost and marginal benefit.
Marginal Cost: how much it costs you to add one moreunit. (= total cost after adding 1 unit)
Marginal Benefit: how much it benefits you to add onemore unit. (= total benefit after adding 1 unit)
How is marginal cost and benefit demonstrated in Birka?
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T7 ± Define marginal cost and marginal benefit.
Summarize!
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Business Calculus