ECON 101 Lecture 3: Marginal Benefit with Relation to Incentives and Economic Models

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22 Jan 2015
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ECON 101 Full Course Notes
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Econ 101 - lecture #3 - marginal benefit with relation to incentives and economic. Recall from last lecture how to calculate marginal benefit and marginal cost. Mb = change in total benefit / change in quantity. Mc = change in total cost / change in quantity. Marginal changes are small incremental changes to an existing plan of action. Studying for one more (or one less) hour per day. Buying a computer with a slightly faster (or slightly slower) cpu. When doing benefit-cost analysis in order to make decisions, marginal cost and benefit, instead of total cost and benefit, matters. The money already spent before is referred to as sunk cost and should not impact decision making. People generally change their behaviors when the costs and benefits of their actions change (meaning that, when their incentives change) Study of incentives is intimately correlated with the analysis of marginal benefit and cost.

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