eco101

• Economic Behavior: An Overview


  Individuals have unlimited wants but limited resources
• Economic Choice


  Individuals assign priorities to their wants and choose their most preferred options from the available alternatives
• Marginal Analysis


  Marginal costs and benefits are the incremental costs and benefits associated with making a decision
• Marginal analysis is a cornerstone of modern economic analysis
• In economic decision making, "bygones are forever bygones" - costs and benefits that have already been incurred are sunk and hence irrelevant to the current economic decision
• Marginal Analysis of Customer Profitability


  • Banks use profitability software to consolidate information on each customer and determine if serving a given customer is profitable or not
• Opportunity Costs and V-8


  • The Campbell Soup Company used the idea of an opportunity cost to create a successful ad campaign for its V-8 vegetable juice
• An action should be taken whenever the incremental benefits of that action exceed its incremental costs
• In calculating marginal costs, it is important to use the opportunity cost of the incremental resources, not their historic (accounting) cost
• If Mary values a tennis game at 9 A.M. and one at 7 P.M. equally

  She will sell during the business day and postpone tennis to the evening
• Opportunity cost


  The value of the best alternative use of a resource
• Campbell Soup Company's V-8 ad campaign


  • The opportunity cost of the soft drink is the forgone V-8
• Marginal costs exceeding marginal benefits means Ludger would be better off rejecting the contract than accepting it
• Opportunity cost


  The value of a resource's best alternative use
• Using limited resources for one purpose precludes their use for something else
• Explicit and implicit costs are opportunity costs that should be considered in the analysis
• If Larry can earn $40,000 in an outside job

  It is better for him to work at the outside job and hire a manager to run the restaurant
• Individuals maximize their personal satisfaction given resource constraints
• People are quite creative and resourceful in minimizing the effects of constraints
• Hackers and corporate spies developing more sophisticated schemes to steal information


  • Intrusion-detection software growing in popularity and sophistication
• Understanding the creative nature of individuals has important managerial implications
• Goods


  Things that people value, including products, services, and less tangible emotions
• Utility


  Personal satisfaction
• Utility function


  Expresses the relation between total utility and the level of goods consumed
• The individual's objective is to maximize their utility function, given resource constraints
• Indifference curves


  Picture all combinations of goods that yield the same amount of utility
• Movements up and to the right on indifference curves are utility-increasing
• Indifference curves are typically convex to the origin, implying willingness to substitute between goods
• Budget constraint


  Limits an individual's purchases due to limited income
• Indifference curves


  • They bow in, as in Figure 2.1
  • Convexity implies that if Dom has a relatively large amount of food, he would willingly exchange a relatively large quantity of food for a small amount of additional clothing
  • The indifference curves are steep when the level of food is high relative to the level of clothing
  • The indifference curves flatten as Dom has less food and more clothing
  • The behavior implied by the convexity of indifference curves is consistent with the observed behavior of many individuals—most people purchase balanced combinations of food and clothing
• Budget constraint


  It limits Dom's purchases of food and clothing based on his income and the prices of the goods
• Budget line


  It depicts the consumption opportunities - all combinations of food and clothing on or below the line are attainable, combinations above the line are infeasible given Dom's income
• Budget line


  • The F intercept indicates how much food Dom can purchase if his entire income is spent on food
  • The C intercept indicates how much clothing he can purchase if his entire income is spent on clothing
  • The slope of the line is -1 times the ratio of the prices of the two goods (Pc/Pf), which represents the opportunity cost of clothing in terms of food
• Changes in income


  Cause parallel shifts of the budget constraint, its slope is unaffected
• Changes in relative prices of the two goods


  Change the slope of the budget constraint
• Optimal choice


  It occurs at the point of tangency between the budget constraint and an indifference curve, where the willingness and ability to trade are equal
• Increase in the price of a good


  Typically leads to the individual purchasing less of that good
• Economists rarely focus on preference-based explanations for changes in choices, as they have little theory to explain what might cause preferences to change
• The managerial usefulness of this analysis comes from its power to identify policy instruments that have a predictable impact on the problems at hand
• Economics has little theory to explain what might cause preferences to change