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AP Microeconomics: 1.5-1.6 Cost-Benefit and Marginal Analysis

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About this unit

In any economy, the existence of limited resources along with unlimited wants results in the need to make choices. In this unit, we introduce concepts of opportunity costs and trade-offs, and illustrate these concepts by using the production possibilities curve. We then consider how different types of economies determine which goods and services to produce, how to produce them, and to whom to distribute them. This unit also covers why and how specialization and exchange increase the total output of goods and services, with a discussion of absolute and comparative advantage. Finally, we touch on the importance of property rights, the role of incentives in the functioning of free markets, and the principle of marginal analysis.

AP® is a registered trademark of the College Board, which has not reviewed this resource.

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Basic Economic Concepts | AP®︎/College Microeconomics | Khan Academy

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In any economy, the existence of limited resources along with unlimited wants results in the need to make choices. In this unit, we introduce concepts of opportunity costs and trade-offs, and illustrate these concepts by using the production possibilities curve.

# data[].attributes.attachment_link.readable_text
If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

To log in and use all the features of Khan Academy, please enable JavaScript in your browser.

About this unit

In any economy, the existence of limited resources along with unlimited wants results in the need to make choices. In this unit, we introduce concepts of opportunity costs and trade-offs, and illustrate these concepts by using the production possibilities curve. We then consider how different types of economies determine which goods and services to produce, how to produce them, and to whom to distribute them. This unit also covers why and how specialization and exchange increase the total output of goods and services, with a discussion of absolute and comparative advantage. Finally, we touch on the importance of property rights, the role of incentives in the functioning of free markets, and the principle of marginal analysis.

AP® is a registered trademark of the College Board, which has not reviewed this resource.

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Basic Economic Concepts | AP®︎/College Microeconomics | Khan Academy

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In any economy, the existence of limited resources along with unlimited wants results in the need to make choices. In this unit, we introduce concepts of opportunity costs and trade-offs, and illustrate these concepts by using the production possibilities curve.

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APMic U1 L5 cost-benefit and consumer choice

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APMac and APMic Unit 1 Lesson 5 - Cost-Benefit Analysis, Marginal Analysis and Consumer Choice

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APMac and APMic Unit 1 Lesson 5 - Cost-Benefit Analysis, Marginal Analysis and Consumer Choice study guide by jclerch includes 12 questions covering vocabulary, terms and more. Quizlet flashcards, activities and games help you improve your grades.

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Define opportunity cost.

Explain the opportunity costs associated with choices.

Calculate the opportunity costs associated with choices.

Explain a decision by comparing total benefits and total costs (using a table or a graph when appropriate).

Calculate total benefits and total costs (using a table or graph where appropriate).

Define the key assumptions of consumer choice theory.

Explain (using a table or graph as appropriate) how a rational consumer’s decision making involves the use of marginal benefits and marginal costs.

Calculate (using a table or a graph when appropriate) how a rational consumer’s decision making involves the use of marginal benefits and marginal costs.

Define marginal analysis and related terms.

Explain a decision using marginal analysis (using a table or a graph when appropriate).

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Rational economic decisions require the evaluation of costs and benefits.

To determine the optimal level at which to pursue an activity whose total benefits exceed total cost, rational economic agents compare marginal benefits and marginal costs.

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Rational agents consider opportunity costs, whether implicit or explicit, when calculating the total economic costs of any decision.

Total benefits form the metric “utility” for consumers and total revenue for firms.

Total net benefits, the difference between total benefits and total costs, are maximized at the optimal choice.

Some decisions permit rational agents to look at only marginal benefit and marginal cost. Other decisions cannot be broken down into increments in this way and must be evaluated by looking at total benefits and total costs.

Consumers face constraints and have to make optimal decisions accounting for these constraints.

In a model of rational consumer choice, consumers are assumed to make choices so as to maximize their total utility.

Consumers experience diminishing marginal utility in the consumption of goods and services.

Consumers allocate their limited income to purchase the combination of goods that maximizes their utility by equating/comparing the marginal utility of the last dollar spent on each good.

Marginal analysis involves comparing the additional benefit of increasing a given activity with the additional cost. Comparing marginal benefit (MB) with marginal cost (MC) helps individuals (firms) decide whether to increase, decrease, or maintain their consumption (production) levels.

The optimal quantity at any point in time does not depend on fixed costs (sunk costs) or fixed benefits that have already been determined by past choices.

The optimal quantity is achieved when marginal benefit is equal to marginal cost or where total benefit is maximized.

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Everyday, you make tons of decisions about consumption. Your choices about what and how much of a good to buy are influenced by the laws of supply and demand. These choices are nearly endless. For example, at Starbucks, each drink is highly customizable. In fact, they offer over 80,000 combinations!

When you buy a good or make a decision about how to use your time, you're getting some sort of value, like a sense of happiness or satisfaction, out of it - economists call this "utility." The increase in that value from buying an additional unit of a good or service is its marginal utility. When you make these decisions, you're thinking at the margin, even if you don't realize it.

Think about how wonderful a shot of espresso, or your beverage of choice, is first thing in the morning. You probably derive quite a bit of utility! But how about a second, third, or even fourth shot of espresso? With each extra shot, you probably get a little less utility. At some point, the cost will outweigh the marginal utility.

When you add up the satisfaction you get out of all of the shots of espresso, that is your total utility. Since each additional shot of espresso has a little less utility, economists refer to this concept as diminishing marginal utility.

This is true for all goods and activities, but the amount of utility and marginal utility depends on the individual. For example, let's say that Starbucks drops the price of shot of espresso. This can change the quantity demanded on aggregate because for some people, the drop in price will make the marginal utility they derive from an extra shot now worth the cost. But perhaps that's not true for you and your consumption will not change.

Are you starting to see how you instinctively think and act at the margin in your daily life?

Up next, we'll explore other factors beyond price that affect your habits as a consumer, such as preferences and income.

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Introduction to Consumer Choice | Marginal Revolution University

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Everyday, you make tons of decisions about consumption. Your choices about what and how much of a good to buy are influenced by the laws of supply and demand. These choices are nearly endless. For example, at Starbucks, each drink is highly customizable.

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1. What is consumer choice?

2. What can consumers do to maximize their utility?

3. What is the formula used to assist in a determination of consumer utility maximization?

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Think through all of the variables that determine the price of a cup of coffee. It might help to imagine the coffee beans on the farm first. Consider the land costs

Think through all of the variables that determine the price of a cup of coffee. It might help to imagine the coffee beans on the farm first. Consider the land costs and the price of the farmer's labor. What about transportation of the beans to the roaster? There are packaging costs, oil costs, driver costs...and we're still only talking about the beans!

Once the roasted beans finally make it to your local coffee shop, they still have to be turned in that cup of coffee. The cost of rent for the building is a factor in the price of the final good, as is the labor of the barista and the price of electricity in your area.

We're barely scratching the surface here, but you get the idea that a ton of variables are behind the price of even a relatively simple good like a cup of coffee. What you, the consumer, are able and willing to pay is yet another one. Your salary helps set your budget constraints. And your budget constraints are a crucial variable in helping you decide whether to spend $5 on that cup of coffee, or $5 on something else.

In this video, we'll examine what budget constraints look like and how they function by graphing a simple example: $50 to spend on $5 coffees or $10 pizzas. You'll see how the graph shifts as variables change. We'll also use this example talk about a fundamental concept in economics that can help you make better decisions: opportunity costs.

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Budget Constraints | Marginal Revolution University

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Think through all of the variables that determine the price of a cup of coffee. It might help to imagine the coffee beans on the farm first. Consider the land costs Think through all of the variables that determine the price of a cup of coffee.