NEW- Micro Unit 1 Summary- Basic Economic Concepts
Summary
TLDRIn this microeconomics unit summary video, Jacob Clifford provides a rapid overview of essential concepts for students preparing for exams. He uses the AP curriculum as a guide, making it suitable for first-year college students and those studying for A-level or CLEP exams. The video covers basic economic concepts, including scarcity, production possibilities, comparative advantage, and marginal analysis. Clifford emphasizes the importance of active participation and practice, offering a study guide and engaging the audience with interactive activities to ensure a comprehensive understanding of microeconomics.
Takeaways
- 🎓 This video is a summary of microeconomics Unit 1, aimed at helping students prepare for exams by quickly explaining key concepts.
- 📚 The video follows the AP curriculum, making it suitable for first-year college students and those preparing for A-level or CLEP exams.
- 🤓 The presenter, Jacob Clifford, uses an activity with hands to illustrate the varying difficulty levels of economic concepts, emphasizing the need for practice and participation.
- 📈 The video introduces the concept of scarcity and its role in economic decision-making, highlighting that economics is fundamentally about choices.
- 🏭 It explains the four factors of production: land, labor, capital, and entrepreneurship, which are essential for understanding how goods are produced.
- 🌐 The differences between microeconomics and macroeconomics are outlined, with microeconomics focusing on individual and firm decisions within the economy.
- 🌟 The video discusses the three economic systems: command, free market, and mixed economies, each with its own advantages and disadvantages.
- 💡 Opportunity cost is a central concept, defined as the cost of the next best alternative when making an economic choice.
- 📉 The production possibilities curve (PPC) is introduced as a model to demonstrate efficient and inefficient use of resources and to calculate opportunity costs.
- 🔄 The idea of comparative advantage is explored, explaining how countries can benefit from specializing in the production of certain goods and trading with others.
- 📊 Marginal analysis, which involves weighing additional benefits against additional costs, is a critical skill for making economic decisions, both for consumers and producers.
Q & A
What is the main purpose of Jacob Clifford's microeconomics summary video?
-The main purpose is to quickly explain all the concepts needed for quizzes, unit exams, or final exams, aiming to help students get an A in their microeconomics class.
Which educational curriculum does Jacob Clifford's video follow?
-The video follows the AP curriculum, which is similar to any introductory microeconomics course.
What is the significance of the fist activity Jacob asks viewers to do at the beginning of the video?
-The fist activity is an analogy for the difficulty curve in economics classes, where some concepts are easy and others become increasingly challenging, emphasizing the need for practice and participation.
What are the five big picture concepts Jacob mentions in microeconomics Unit 1?
-The five concepts are: scarcity and decision-making, economic systems, production possibilities curve, comparative advantage, and marginal analysis.
What is the difference between microeconomics and macroeconomics as explained in the video?
-Microeconomics focuses on small economic units and individual or firm decisions, while macroeconomics looks at broader economic factors like growth, unemployment, inflation, and policies affecting the entire economy.
What are the three types of economic systems discussed in the video?
-The three types are command economies, free market economies, and mixed economies.
How is opportunity cost demonstrated in the production possibilities curve (PPC)?
-Opportunity cost is shown in the PPC by the trade-offs between different combinations of goods that can be produced, with the curve representing efficient production and points inside or outside the curve indicating inefficiency or impossibility.
What does the shape of the production possibilities curve (PPC) indicate about opportunity cost?
-A bowed-out PPC indicates increasing opportunity cost, where producing more of one good requires giving up more of another good due to differing resource requirements. A straight line PPC indicates constant opportunity cost, suggesting similar resource requirements for the two goods.
How does the concept of comparative advantage apply to international trade as explained in the video?
-Countries with comparative advantage can specialize in producing specific goods and trade with other countries, doing so at a lower opportunity cost than if they produced everything on their own.
What is the importance of marginal analysis in microeconomics?
-Marginal analysis is crucial for making decisions by weighing the additional benefits against the additional costs, a skill that is fundamental to understanding and applying microeconomic principles.
Outlines
📚 Introduction to Microeconomics Unit 1
Jacob Clifford welcomes students to a microeconomics unit summary video, designed to swiftly cover essential concepts for exams. The video aligns with the AP curriculum, suitable for first-year college students and those preparing for advanced-level exams. It introduces Unit 1, focusing on basic economic concepts. An interactive activity involving fist gestures serves as an analogy for the learning curve in economics, illustrating the transition from easy to complex concepts. The video emphasizes the importance of active participation and practice, encouraging students to pause and engage with the material. A study guide is mentioned as a supplementary resource, available for free with a sign-up for a preview.
🌟 Key Concepts in Microeconomics
The video outlines five fundamental concepts in microeconomics: scarcity and decision-making, economic systems, production possibilities, comparative advantage, and marginal analysis. It explains that economics is about choices due to limited resources and unlimited wants. The economic system dictates production, distribution, and allocation of resources. The production possibilities curve (PPC) illustrates the maximum output combinations of two goods, highlighting efficiency and opportunity costs. Comparative advantage is introduced as a reason for countries to specialize in production and engage in trade. Lastly, marginal analysis is presented as a decision-making tool that weighs additional benefits against additional costs.
🏭 Economic Systems and Opportunity Cost
The video delves into the differences between command, free market, and mixed economies. Command economies are characterized by government ownership and control over production, leading to less individual freedom but potentially more social welfare. Free markets prioritize profit, driven by the 'invisible hand' of self-interest, which can lead to innovation and higher quality products but may neglect public goods. Mixed economies attempt to balance the benefits of both approaches. The concept of opportunity cost is explored through the PPC, which demonstrates how societies must choose between different combinations of goods, forgoing the next best alternative.
🔍 Deep Dive into Comparative Advantage
This section tackles the challenging topic of comparative advantage, explaining how countries with different resources can benefit from specializing in certain goods and trading with others. The video guides viewers through identifying absolute advantage, calculating opportunity costs, determining comparative advantage, and establishing mutually beneficial terms of trade. It uses a hypothetical scenario involving the US and Canada producing cars and planes to illustrate these concepts. The video also touches on the difference between output and input comparative advantage questions, providing a comprehensive overview of this complex topic.
💭 Thinking Like an Economist
The video introduces the skill of thinking like an economist, focusing on the concept of opportunity cost. It differentiates between explicit and implicit costs, emphasizing that all decisions involve trade-offs. The cost of any activity is the value of the next best alternative foregone. The video also introduces marginal analysis, a decision-making approach that considers the additional benefits and costs of each choice. It discusses the law of diminishing marginal utility, which states that the satisfaction gained from each additional unit of a good consumed decreases.
🍟 Maximizing Utility through Marginal Analysis
The final section of the video applies marginal analysis to consumer choice, using examples to illustrate how individuals make decisions by comparing the additional benefits to the additional costs. It discusses the utility-maximizing rule, which involves calculating the marginal utility per dollar spent on different goods to determine the optimal consumption combination. The video provides a practice problem involving a choice between Tahiti and San Diego vacations, emphasizing the importance of maximizing utility per dollar. It concludes with advice on next steps for study, including practicing with multiple-choice and free-response questions.
Mindmap
Keywords
💡Scarcity
💡Production Possibilities Curve (PPC)
💡Opportunity Cost
💡Comparative Advantage
💡Marginal Analysis
💡Law of Diminishing Marginal Utility
💡Economic Systems
💡Factors of Production
💡Microeconomics vs. Macroeconomics
💡Utility Maximizing
Highlights
Introduction to microeconomics unit one summary video by Jacob Clifford.
Quick explanation of all concepts needed for quizzes, unit exams, or final exams.
Use of AP curriculum as a basis for the summary, applicable to various introductory microeconomics courses.
Engagement activity involving making a fist to illustrate the difficulty curve in economics.
Emphasis on the importance of practice and participation for understanding economic concepts.
Availability of a free Unit 1 study guide to accompany the video.
Overview of five big picture concepts in microeconomics Unit 1.
Discussion on scarcity and the necessity of decision-making in economics.
Explanation of the four factors of production: land, labor, capital, and entrepreneurship.
Differentiation between microeconomics and macroeconomics.
Introduction to the three economic systems: command, free market, and mixed economies.
Explanation of opportunity cost due to scarcity and the concept of the production possibilities curve (PPC).
How to use the PPC to demonstrate economic efficiency and calculate opportunity costs.
The impact of societal changes on the PPC and its shape in relation to increasing opportunity costs.
Deep dive into comparative advantage, absolute advantage, and opportunity costs.
Practical example of calculating terms of trade and mutual benefits in trade.
Introduction to the concept of explicit and implicit costs in decision-making.
Explanation of marginal analysis and its importance in economic decision-making.
Illustration of the law of diminishing marginal utility through consumer choice examples.
Utility maximization and consumer choice through calculating marginal utility per dollar.
Final recommendations for practice and next steps after completing the study guide.
Transcripts
Hey econ students this is Jacob Clifford. Welcome
to the microeconomics unit one summary video [music].
In these summary videos I quickly explain all the concepts you need
for your next quiz, unit exam, or your final exam.
Basically everything you need to get an A in your class.
But I'm going to be going quick. I am going to be using the AP curriculum.
That's pretty much the same as any introductory microeconomics course. So if you're a first year
college student or you're preparing for the a level or CLEP exam, it's all the same stuff.
This video covers Unit 1 Basic Economic Concepts.
Now before we get started let's do a quick activity. I want you to make a
fist with your right hand. I want you to put your thumb out to put your pinky
out. So just like this. Here we go this is round one. Okay, you got it.
All right, here comes round two. Same thing on both hands. Thumbs out,
pinkies out. Thumbs out, pinkies out. Try this see how you do.
Here comes round three. I want thumb out pinky out, thumb out pinky out. Do this.
Now there's two reasons why we did that activity. The first is this
is a great analogy for what you're going to see in an economics class.
Some concepts are super easy like the definition of scarcity. Duh, I get it. It's easy.
And, eventually things get a little harder like drawing the
production possibly is curve or supply and demand but they're still pretty easy.
But then things are going to get a lot harder
like figuring out comparative advantage or terms of trade.
That stuff is harder and you're going to feel confused.
There's concepts in this class that I'm going to do fast, but you got to slow down.
You got to practice and it's okay to make mistakes. You just got
to keep doing it until you're like,, "yeah, okay I got it."
Trust me it's not enough just to watch me draw the graphs and do the calculations.
You're going to have to practice. You're going to have to do it yourself.
Now the second reason we're doing this activity is I wanted to find
out if you're willing to participate.
If I had you do this and you didn't do anything. Round two you didn't
do anything. Round three you're just sitting there with your hands not moving,
you're probably setting yourself up for failure.
If you're not participating then you're definitely not going to get the most out of these videos.
Because, every once in a while I'm gonna say stop this video, I want
you to draw this graph or do those calculations.
And, I promise you I'm not wasting your time.
I know the questions your teacher or professor is going to ask you.
So, when I ask you to stop and practice,
go ahead and try those things because that's what you're going to see on your next exam.
And that's also why I created a study guide that goes along with this video. The Unit 1
study guide is inside my ultimate review packet and it's free, just sign up for the free preview.
The link is in the description below.
And I just uploaded new study guides so make sure you have the most updated version.
So here we go, pause this video go download and print the Unit 1 study guide.
Have it ready to go and start the video back up. [Music]
Okay here we go! You've got your study guide, your video,
you got your energy and excitement, Let's jump into it let's learn some economics!
Let's start with a quick overview. There's five
big picture concepts that you need to know in microeconomics Unit 1.
Number one, economics focuses on scarcity and how
it requires individuals businesses and governments to make choices.
Number two, society's economic I system determines what will be produced,
how it will be produced, and how it will be allocated.
Number three, the production possibilities curve shows a different combinations of two
goods that can be produced using all a country's resources to the fullest.
Number four, countries that have a comparative advantage can specialize
in the production of specific goods and trade with other countries at a
lower opportunity cost than if they produce everything on their own.
And number five, marginal analysis involves weighing the additional
benefits and the additional costs of any decision.
Now that was the big picture. Now let's jump into specific topics.
Every economics class starts by looking at scarcity, the idea that we have unlimited
wants but limited resources. Which means we're forced to make choices.
For example, you have to decide who you want to take out on a date on Friday night,
because you definitely can't take two people out.
And, businesses have to decide how many units to produce or how many workers to hire.
And, governments need to decide how many public services to provide or
what policies are best to fight inflation or to promote growth.
Ao when you boil it down, economics is a study
of choices and decision-making. So that's why you're taking this class.
Learning economics is going to make you a better decision maker.
Just look at the highest paid college majors. Most of the
ones at the top are in STEM but take a look right here... economics. Oh yeah!
When I talk about limited resources a lot of students assume I'm talking about money,
but money is not a resource.
Yes, we use money to make transactions but
it's not a resource because you can't produce anything with it.
Instead your teacher or professor is going to talk about the four factors of production.
The four things we need to produce stuff: land labor capital and entrepreneurship.
Land is anything from mother nature, like water, minerals, crude oil, or sunlight.
Labor is obviously the work that humans do. Everything you did during your summer job.
For capital there's two types, there's physical capital and human capital:
Physical capital are things like tools machines and factories used to produce stuff.
Human capital is the knowledge experience and training that makes workers more productive.
By the way, that's another reason why you're taking economics. You're trying to increase
your human capital making yourself more productive and more valuable to employers.
And the last factor is entrepreneurship. The person that brings together all the
their resources starts the business and takes the risk.
Another thing your teacher or professor might talk about
early on is the difference between microeconomics and macroeconomics.
Macro looks at things like growth unemployment
inflation and different policies to speed up or slow down the economy.
"We are strongly committed to returning inflation to our 2% goal"
Microeconomics is a study of small economic units
and looks at the decisions of individuals and firms.
Things like the costs of production the different kinds of markets and the effect
of government regulations like minimum wage.
"Fast food work across our state getting a big raise starting today
their minimum wage going up to $20 an hour. "
That's what you're going to learn in this class. This is microeconomics!
Okay that's it for topic 1.1. I know it was super easy. Go ahead
and take out your study guide fill out that section for 1.1.
In topic 1.2 you learn about the three economic
systems. The three ways to organize and distribute society's scarce resources.
There are command economies, free market economies, and mixed economies.
A command economy, or centrally planned economy, is where the government owns
the factors of production and decides what to produce, how to produce it, and who gets it.
Since government bureaucrats make the decisions, the disadvantage is that
individuals often have fewer freedoms and are told where to work and where to live.
But, the advantage of central planning is that it often reduces unemployment,
limits income inequality, and prioritizes social welfare instead of profit.
Now in a free market profit is everything! :)
Privately owned businesses produce goods and services and compete with
each other to earn your money. To earn profit.
Your textbook calls this the "profit motive"
A famous quote by Adam Smith, the father of economics, explains it best.
"It's not from the benevolence of the butcher, the brewer,
or the baker that we expect our dinner, but it's from their regard to their own self-interest."
This is the miracle of markets, what's often called "The Invisible Hand."
As individuals pursue their own self-interest,
they inadvertently help society as a whole. Think of it this way,
a business can't earn profit and make themselves better off without making the customer better off.
That, and competition between businesses, results in higher quality products at a lower price.
But there are disadvantages, for example, the free market doesn't provide public goods and services.
There's no profit in providing a public park or free public
education so the free market won't produce those goods and services.
Also a free market might have more income equality with a larger gap between the rich and the poor .
And that's why most countries have adopted a mixed economy where individuals own the
factors of production but the government plays a part in regulating monopolies,
providing public goods and services, and redistributing income.
They want the Innovation and growth that comes with free
market capitalism and the social welfare that comes with some central planning.
Now that's all I'm going to say about the economic systems. If you want to
learn more take a look at the video I made with the Crash Course folks or
take a look at the video where I went to China and that lady was checking me out.
"Did you notice that lady check me out"
So that's it for this topic. Again it's super easy so fill out section 1.2 on your study guide.
In topic 1.3 you're introduced to a concept you're going to use for the
rest of your life, the idea of opportunity cost.
Because of scarcity we're forced to make choices and every choice has a cost, an opportunity cost.
It's the cost of the next best alternative. The
thing that you would have done if you didn't make that choice.
For example, the cost of going to the movies tonight is not just the price of the ticket,
it's also the time you could have spent studying for your economics class,
or the money you could have earned by spending that time babysitting instead.
So individuals businesses and the government all make decisions
by factoring in their opportunity cost. The thing they're giving up.
And this is when you see the very first graph you see in an econ class,
the production possibilities curve.
Your teacher might call it the production possibilities "frontier" but it's the same thing.
It's a model that shows the alternative ways we can use
our scarce resources to produce only two goods.
It usually starts off with a chart like this showing the different
combinations of two goods that can be produced using all of our resources.
When you plot these combinations you get the production possibilities curve, the PPC.
Now there are three things that you're teaching or professor is going to have you do with this graph.
First, they're going to ask questions having you explain
how this graph demonstrates different economic concepts, like efficiency.
Any point inside the curve is inefficient because we're not using our resources to the fullest.
Any point on the curve is efficient and any point outside the curve is
impossible or unattainable because we don't have enough resources.
Second your teacher will ask you to use the PPC to
calculate the opportunity cost of moving to different combinations.
For example, the opportunity cost of moving from combination B to combination C is three bikes,
and the opportunity cost of moving from combination E to combination D is two computers.
The third thing your teacher will have you do is
show how changes move or shift the PPC. For example, let's practice.
Here's a PPC showing the different combinations of
pizza and computers that can be produced in your hometown.
Show what happens on this graph if people decide to eat healthier and
want less pizza. Be sure to pause this video and see if you can figure it out.
Now you might be thinking, people want less pizza
so the curve is going to shift inward for pizza. But that's not what's going to happen.
What is going to happen is this.
People want less pizza so we're going to decrease the amount of
resources allocated towards pizza and move them towards producing computers.
Think about it we don't have fewer pizza ovens or less cooks. The amount
of pizza we can produce hasn't changed we're just changing the combination.
There's one last thing that you have to know about the PPC and it has to do with the shape.
You're likely to see two different types of PPCs.
Ones that have a bowed out curve and ones that have a straight line.
A bowed out PPC shows the idea of increasing opportunity cost. As
more of one product is produced, the opportunity cost gets bigger.
In other words, when you produce one good you have to give up more and more
of the other good because the resources to produce both goods are not very similar.
For an example, let's use corn and cars. If we're right here and only producing corn then all of our
workers are making corn, including engineers that are better suited towards making cars.
When we produce our first few cars the amount of corn given up is not very
high because we're just moving engineers out of the farms and into the factories.
But, as you keep doing this producing more and more cars eventually you need to start
moving the farmers out of the farms and into the factories and you're going to lose a lot of corn.
This is the law of increasing opportunity cost.
Again it happens when the two products have totally different
resources and results in a bowed out PPC.
A straight line PPC means the opportunity cost is constant. This
happens when the resources that produce to two different goods are very similar.
For example, plastic forks and plastic spoons. Producing more forks doesn't result in the loss
of more and more spoons because it require the same types of resources.
Now remember this is a summary video and I'm going pretty quick on purpose. So,
if you need more help with the PPC take a look at my videos on YouTube.
But if you can answer the questions on your study guide then you totally understand it and
you're ready to move forward. So pause this video and fill out that section let's see how you do.
Okay by far the hardest topic in this entire unit
is right here. We're talking about comparative advantage.
"It's not that hard Scott. Tell him." "It's incredibly hard."
The general idea is really simple countries have different climates
and different resources so they can specialize in one
thing and trade with other countries that specialize in producing something else.
So the concept is easy but the questions you're going to see on your exam those are hard.
Your teacher or professor is going to give you a question like this
with two countries, two products, and numbers.
In this case, the number of cars or planes the US and Canada can make in one day.
The countries, products, and numbers might change
but you'll always be asked four different types of questions:
Number one, identify which country has an absolute advantage for each good.
Number two, calculate the opportunity cost for each country.
Number three, identify which country has a comparative advantage in which good.
And, number four, identify a terms of trade that is mutually beneficial for both countries.
That's it. If you could do these four things then you are ready
for any question your teacher or professor is going to give you.
I have a bunch of videos on YouTube that explain these
concepts and let you practice but right now let's practice these four skills.
So pause the video here's four questions good luck.
Okay how'd you do? Did you do well? I hope so. Let's go over the answers.
A country has an absolute advantage if they're better at producing a product than
another country. So, all you have to do is look at the raw numbers.
The US can produce five planes and Canada can only produce two planes
so the United States has an absolute advantage in the production of planes.
And the US also has an absolute advantage in the production of
cars because they can produce more than Canada.
So the answer to question one is "No, Canada does not have an
absolute advantage in cars because they produce less than the United States.
Again it's super easy. Next,
it's time to calculate opportunity cost, which is a little harder.
For calculating opportunity cost, we know that when the US produces 5 planes
they can't produce 10 cars but what's the cost of producing only one plane?
To figure that out you need the equation for per unit opportunity
cost. It's the number of units given up, divided by the number of units gained.
So for question two if 5 planes cost the US 10
cars then the opportunity cost of 1 plane is 2 cars.
And you can flip that to get the opportunity cost for one
car. If 10 cars cost the US 5 planes then the opportunity cost for one car is 1/2 a plane.
Again what you're calculating is called per unit opportunity cost.
Now let's go do the same thing for Canada. For Canada,
each car costs 1/4 a plane and each plane costs 4 cars.
By the way, notice there always a reciprocal. If one is 4,
the other one's going to be 1/4. If one is 10 the other one is going to be 1/10th.
Okay now we have enough information to answer question three and find the comparative advantage.
Just ask yourself, "who should produce planes, the country that gives up 2 cars or the country
that gives up 4 cars?" Obviously, it's better to give up less, so the United States has a
comparative advantage in the production of planes because they have a lower opportunity cost.
And Canada has a comparative advantage in cars. One car cost Canada only 1/4 a plane
but it cost United States 1/ 2 a plane. So, with these numbers, Canada should specialize
in producing the cars the United States should specialize in producing planes.
But we're not done. The last step is by far the hardest. It's finding the terms of trade.
We know that each country should specialize and produce only one
thing. But how many cars should Canada trade for how many planes?
The quick answer is that both countries will be willing to trade if, and only if,
they can get the other product at a lower opportunity cost than if they produce themselves.
For example, we know that Canada should specialize
in cars and if they did make planes it will cost them 4 cars for each plane.
But if they could trade 3 cars for one plane they'd be better off. They could
specialize in producing cars and trade with the United States and
get planes at a lower opportunity cost than if they made planes themselves.
And it's the same idea for the United States. We know they should specialize
in planes and if they made one car it'll cost them 1/2 a plane given up.
Ao if the United States can get one car for anything less than1/2 a plane
then they're better off. With trade they can be getting cars
at a lower opportunity cost than if they produce them themselves.
So to answer question four, trading one plane for three cars would be mutually beneficial. It
would benefit both countries because Canada can get a plane by only giving up 3 cars instead of
4 and the United States can get a car by giving up only 1/3 of a plane instead of giving up 1/4.
Woohoo! That was a lot. I'm telling you this is by far the hardest topic,
so here's a video of a puppy running to help you unwind.
Now hopefully you understood all of that but we're not done. There's
actually two different types of comparative advantage questions.
The one you saw was an output question. Now we also have to talk about input
questions. It's very likely that you'll see both types on your next quiz or exam.
Now watch carefully. I'm going to convert this output question
that I just gave you into an input question. So here we go, right now!
Notice the countries, products, and the numbers are the same. The only difference
is what those numbers mean.
Now they represent hours. Look at the top of the chart it says this chart
shows the number of hours it takes each country to produce one car or one plane.
So in an output question those numbers represent the number of cars and planes
produced. Now we're looking at the hours to produce only one.
So now who has an absolute advantage in the production of cars? Well, now it's Canada because
it only takes them 8 hours to produce one car and it takes the US 10 hours to produce one car.
Now this also changes how you calculate per unit opportunity cost. If the US takes 10 hours
to produce a car and 5 hours to produce a plane then the opportunity cost of one car is 2 planes.
So when it comes to input questions, the opportunity cost is actually the reciprocal,
or it's flipped, compared to output questions.
Now after that you just do exactly what you did before. Who should specialize in cars? Well,
the United States because they only give up 2
planes and Canada gives up 4 planes. The US has a lower opportunity cost.
And Canada should specialize in planes because each plane costs
1/4 a car for the United States it's 1/2 a car .
And, trading one car for three planes is a mutually beneficial terms of trade.
Now, I know I went over that last part fast,
but that's on purpose. Remember this is a summary video. I have more videos on YouTube.
If you're still lost a little bit, go back and watch my practice videos or my
hacks video. They'll give you tons of tips and strategies to make sure that you're getting it.
You're going to find out right now if you know how to do this. Take out your study
guide. I have two sets of questions for you. The ones on the left are output questions. The
one that right those are input questions. So right now pause this video good luck
In Topic 1.5, we dive deeper into the skill of thinking like an economist.
So here's a question for you, "how much does it cost to watch a YouTube video?"
Before you enrolled in this class, you would probably say there is no cost it's free. But
now you know better. The cost of watching a YouTube video is the time you could have
spent playing video games, or cleaning your bedroom, or looking for a part-time job,
or it's just a different video that you could have been watching instead.
Those are all trade-offs. The things that you could have done. Your opportunity cost is the
one thing you would have done instead. Again, it's the next best alternative.
So watching a YouTube video isn't free. There's still a cost. Your opportunity
cost. Economists differentiate between two types of costs: explicit costs and implicit costs.
Explicit costs are those traditional out-of-pocket costs associated with
making a decision. It's the cost of the movie ticket when you go to the movies.
Implicit costs are those behind-the-scenes opportunity costs when you make a decision.
It's the value of of your foregone time or your foregone wage when you go to the
movies. These costs are totally subjective and hard to quantify,
but they're just as important when it comes to decision making.
Now I talk more about cost benefit analysis in a video on YouTube. If you haven't seen it,
take a look because I bet it covers your opportunity cost.
Now I know this is super easy we're just introducing the concept here in Unit 1.
We're going to come back to it in Unit 3 when we calculate revenue and profit. For now,
just understanding the basics is enough. So fill out Topic 1.5 on your study guide.
If there's only one skill that you need to master
in microeconomics it's the idea of marginal analysis.
It's making decisions by looking at the additional benefit and the additional
cost. So just remember marginal means additional.
Let me explain with a super simple example. Let's say you're deciding
on how many times you want to see the same movie. The marginal benefit of
seeing the movie the first time is $30, the marginal benefit of the second time is $15,
and the marginal benefit of the third time is $5, so the total benefit is $50.
Assume the cost of going to the movies is $12 so the total cost of going three
times is $36. The question is how many times should you watch the movie and why?
Notice the total benefit is greater than the total cost
but you wouldn't go see the movie three times.
You would definitely go the first time because the
additional benefit is $30 the additional cost is $12.
You'd also go the second time because the
additional benefit is $15 the additional cost is $12.
But you wouldn't go the third time because the additional
benefit is only $5 and the additional cost is $12.
This is the idea of marginal analysis.
When you make decisions, you don't look at the total benefit and the
total cost you look at the additional benefit and the additional cost.
Now I know you might be thinking. "man this is super unrealistic. No one does
these calculations before they go to the movies. True, no one really writes this out but economists
argue that you do these calculations in the back of your brain all the time."
Even right now in the back of your brain you've been calculating the additional benefit from an
additional minute of studying economics and weighing that against the additional cost.
Now there's something else I want to point out about our movie example.
Notice the additional benefit of going to the same movie over and over again
is going down. This is because of the law of diminishing marginal utility.
The law states that as you consume anything, the additional satisfaction,
or joy, you get from it will eventually decrease.
Your marginal utility, your satisfaction, can go up like those first few french fries you eat,
but eventually the additional satisfaction you get from each additional fry is going
to fall. You're going to get less than less marginal utility.
In the movie example, we measured your benefit in dollars but usually
we use something else it's called "Utils".
Think of utils like happiness points. A way to quantify utility.
"This is worth at least 50 utils"
One of the things you're probably going to have to
do on your next quiz or unit exam is called utility maximizing and consumer
choice. It involves making decisions by calculating margin utility per dollar.
For example, suppose you're deciding to go on vacation in Tahiti or San Diego. Going to
Tahiti gives you 10,000 utils and going to San Diego gives you 2,000 utils. Now obviously you
prefer Tahiti but that doesn't mean you choose that option. You also have to look at the cost.
If the price of going to Tahiti is $10,000 and the price of going to San Diego is $11,000
then you should actually pick San Diego because you get more utility per dollar.
So what does this look like on an exam? Let's do a practice question.
The table below shows Ben's total utility from consuming different amounts of french
fries and shakes. The price of a bag of french fries is $2 and the price of a shake is $3.
Fill out the blanks in the chart and answer these questions. Pause the video. Good luck.
How did you do? Did you get it? Let's find out.
The margin utility is the change in total utility divided by the change in quantity.
Now since the change in quantity is just one then it's just the change in the total utility.
So for French fries it's 12 utils, 8 utils, 6, 4,
and 2. Notice it's falling because of the law of diminishing margin utility.
For shakes the margin utility is 24 utils, 18, 12, 9, and 6. Again this is
the additional satisfaction that Ben gets from consuming different quantities of each good.
So to answer question one, Ben's margin utility for consuming the third Shake is 12 utils.
For question two, Ben's total utility for consuming two bags of french fries
and three shakes is 74 utils. He gets a total of 20 from the fries and 54 from the shakes.
For question three, we have to fill out that last column and calculate
margin utility per dollar. This puts everything in like terms so
we can compare apples to oranges, or in this case fries to shakes.
Fries are $2 each the marginal utility per dollar is 6 utils, 4, 3, 2, and 1.
Shakes are $3 each the margin utility per dollar is 8 utils, 6 utils, 4, 3, and 2.
The final step is to use marginal analysis and find out how many of each good Ben should buy.
The first shake gives the most marginal utility per dollar so he's definitely going to buy that
first. Next he's going to buy the first bag of french fries and the second shake.
Next he's going to buy the second bag of french fries and the third shake and,
since he still has money, he's going to buy the third bag of french fries and the fourth shake.
Now he spent the whole $18. $6 on the french fries and $12 on shakes. The point of all this
is that that combination of three fries and four shakes maximizes Ben's utility.
With $18 there's no better combination that gives you more satisfaction. You
used marginal analysis to make the best choice.
To be more specific, what you used is the utility maximizing rule. It looks
like an equation but really it's a procedure. To maximize utility, calculate the margin utility
of option A and divide that by the price. That gives you the margin utility per dollar.
And do the same thing for option B. Calculate the margin utility and divide that by the price.
If option A gives you more margin utility per dollar than you do it. But, eventually,
that number is going to start to fall as you do it over and over again until the margin
utility per dollar for option B is greater. If that happens, start doing option B instead.
And for these questions, keep doing that over and over again until you run out of money.
Now remember this is only the first time we're going to use marginal analysis to make decisions.
We're going to do variations of the same thing over and over again in future units.
Whether it's a firm deciding how many units to produce or an employer deciding how many
workers to hire, we're going to be using a lot of marginal analysis.
Just remember it's all about looking at the additional benefit and the additional cost.
Okay that's it for consumer choice and maximizing
utility take out your study guide and fill out Topic 1.6.
Okay now you're done with your study guide so what are the next steps?
The next thing you should do is the unit practice multiple choice
questions I have in the ultimate review packet.
And, when you're ready take a look at the unit one free responses inside the ultimate
review packet. Try those questions on your own then look at the answer
key and if you need more help watch the video where I go over all the answers.
Okay that's it for microeconomics Unit 1.
If this video helped you ,please give it a like and leave a comment below. And,
please consider subscribing. Thanks for READING. Until next time.
"this is worth at least 50 utils."
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