Group 6: the Manatees

Group 6: The Manatees

John Bargayo

Lindsey Gillies

Jeff Glowa

Brian Dennis

Ali Hafez

Matt Stone

Optimal Scale

Overview for the entire module:

·  Just Distribution

·  Law of Diminishing Utility

·  Ecological footprint

In this module we will be focusing on various topics that all try to achieve or help explain Optimal Scale. There will be an overview of just distribution, the effective and “fair” means of the allocation of resources. There will be an activity as well as videos focused on the law of diminishing utility, where one extra good does not provide the same amount of utility as the one before it. There will also be discussion on our ecological footprint, puts an economic value on environmental deficit . While reading through this module try and relate it to your own experiences you’ll be surprised by how close these topics hit to home. As a whole we all must realize that we are now in a “full world” which means that the economy has already overtaken and overused much of Earth’s resources. To solve this problem we must look at optimal scale and it’s underlying themes.

The Optimal Scale Equation:

Objectives:

·  Identify Marginal Costs and Marginal Benefits

·  Provide a foundation to aid in the understanding of Just Distribution, The Law of Diminishing Utility, and Ecological Footprint

The theme of optimal scale is prevalent throughout economics. In fact, it IS the fundamental rule of microeconomics. Commonly it is called the “when to stop rule”, that is, when the marginal or extra costs (MC) of a service or product equals the marginal benefits (MB), we should stop the growth.

MC=MB

http://www.enviroliteracy.org/article.php/1323.html

Marginal cost is the cost of producing one extra unit, and marginal benefit is the benefit each unit produces. When growth continues past this point of optimal scale it becomes uneconomic and the costs will outweigh the benefits. Calculating benefits is not an easy task but the basic equation is like so:

http://william-king.www.drexel.edu/top/Prin/txt/MBch/Eco442.html

Burgers can be substituted by any product. MB=MC is an important concept because everyone always wants growth, and growth is good but only up to a certain point. For example, businesses rate themselves on how many new customers they obtain or how many new products they are able to sell. All of that is great, but you cannot keep producing new products if you do not have the resources to do so. We do not have unlimited resources but instead we have finite resources. We must realize our economy is a subset of the environment and we can only grow until a certain point and after this point the benefits of growth are not worth the extra cost.

Activities:

·  Marginal Cost

1.) Marginal cost is not an easy concept to grasp. To help clarify, watch this video on Marginal Cost by Richard Mckenzie and then answer the questions in 1.A. http://www.youtube.com/watch?v=adldDfQOSg8

1.A.) In the video Richard Mckenzie, uses bushels of tomatoes as an example for what? Create you own example using a different set of goods. Post your idea on the module forum and be sure to review the submissions by others.

·  Marginal Benefit

2.) Marginal benefit is not easy to measure, to learn how to calculate and provide additional background on the subject, visit http://william-king.www.drexel.edu/top/Prin/txt/MBch/Eco442.html continue through the application until the “demand” section starts.

2.A.) After also reading the law of diminishing utility section. Reflect on how benefits work in sync with diminishing utility. How are they related?

2.B.) Define realized net benefit and unrealized potential net benefit.

·  Review

1.) For another explanation of marginal cost and how marginal cost is calculated visit,

http://en.wikipedia.org/wiki/Marginal_cost

http://www.econmodel.com/classic/terms/mc.htm

2.) If confused with a term, www.Econmodel.com is great site to visit to learn the definitions of specific economic terms.

3.) For another explanation of MC=MB visit http://www.enviroliteracy.org/article.php/1323.html

Sources:

http://www.enviroliteracy.org/article.php/1323.html

http://william-king.www.drexel.edu/top/Prin/txt/MBch/Eco442.html

http://www.youtube.com/watch?v=adldDfQOSg8

http://en.wikipedia.org/wiki/Marginal_cost

I. Optimal Scale and Just Distribution

Objectives:

·  Provide background knowledge on the relationship between optimal scale and just distribution.

·  Offer a broad view of the way resources are allocated in the current economic framework

·  Utilize web resources to stress the idea that just distribution is attainable as long as the consumer is aware and conscious of what they are purchasing.

Introduction:

Scale is defined as “the physical size of the economic subsystem relative to the ecosystem that contains it”. Sustainable scale implies that there is a symbiotic relationship between the economy and the ecosystem in which it exists that requires conscious, transdisciplinary, thought prior to further growth. Essentially, just distribution of the earth’s finite resources is dependent on the ability to obtain, and maintain, a sustainable scale. Reaching the goal would help to ensure that resources are available for future generations. Currently, the allocation of resources, via free market action, focuses on solely the here and now. Optimal scale is reached when marginal costs are equal to marginal benefits. Ecological economics varies from conventional economic thought when examining when growth turns uneconomic. Marginal costs extend further than just the factors of production (labor and capital). There are always environmental and social costs of production as well. These costs must be quantified in order to reach an optimal scale.

Today, in the United States, resources are allocated through the market. This is efficient, in theory, as consumer demand and firm supply will meet at equilibrium. Essentially, quantity and price are determined by preferences, demand, and scarcity. This, however, fails to satisfy the need for a socially just distribution of resources. There is a problem of imperfect information that is ignored in conventional economics. Most people don’t think about how their actions, consumption habits, will affect future generations. What we use today will not be available tomorrow, and the waste that we produce will not leave when we die. Thus, the idea of a socially just distribution of resources should be in the minds of all policy makers and economists that study optimal scale.

Growth and development are dependent on natural resources. It would be naïve to suggest that the eradication of poverty and world hunger are possible without further growth and use of our finite resources. Just distribution, thus, is more realistically attainable by changing the manner in which we grow.

Activities:

1.  Just distribution, as discussed in the introduction, is a real goal, but how do we achieve it? Our economic framework is defined by consumer behaviors. Can the free market remain unregulated if just distribution is the desired end? The idea of reallocation, by a third party, suggests a step towards socialism. How, then, can the individual become a socially responsible consumer? Watch the following video of a speech given by a coauthor of the book Cradle to Cradle, Bill McDonough. After you have finished, reflect on the issues discussed and free write on the website’s blog.

http://www.ted.com/index.php/talks/view/id/104

2.  If we truly adopt the belief that just distribution is reliant on individual actions changing the cultural norm then, as consumers, we are accepting a huge responsibility. It is thus personal consumer decisions that will increase the demand for socially responsible products. Think of five goods you consume, or use, on a daily basis (i.e. water bottle, pen, shoes, jacket). Now try to find out what those goods are made of. Is that information readily available to the public? Are there potentially hazardous materials in that good that are not reported directly? Write a letter to any company you feel obstructed information from you letting them know your opinions.

3.  A good movie to watch on the over consumption of resources can be found in the “Extraction” chapter in www.storyofstuff.com . We are simply using too many resources and not reusing enough. Think about what you can cut down on using as well as think about reusing and maybe even donating. Post your thoughts on the forum located on the website for this module.

Sources:

E. Daly, Herman and Farley, Josh. Ecological Economics.

Washington D.C.: Island Press, 2004.

www.storyofstuff.com

http://www.ted.com/index.php/talks/view/id/104

II. Law of Diminishing Utility

The law of diminishing utility states that each successive good consumed provides less utility than the one before it. The second piece of pizza wasn’t nearly as satisfying as the first piece. In this section we will focus on this topic as well as how to optimally spread ones resources. Essentially because of the law of diminishing utility we cannot spend money on just one good, but we must balance them between goods until the utility from each good is equal.

Overview:

In this module, the student learner will explore the Law of Diminishing Marginal Utility through actively participating in various activities, videos, and by working through real-life problems.

Economic Concepts Covered in this Module:

·  Utility

·  Marginal Utility

·  Law of Diminishing Marginal Utility

·  Paradox of Value

Objectives:

·  Define the terms and ideas of Utility, Marginal Utility, Law of Diminishing Marginal Utility

·  Apply the concept of Diminishing Marginal Utility by reviewing real-world examples and then creating original examples

·  Carry out specific activities and watch videos relating to the Law of Diminishing Marginal Utility in order to better understand the application

·  Be able to contribute a unique question or comment of your own on the this topic into an online forum

Materials:

·  One package of fun-size candy bars

·  Computer (with Internet capabilities)

·  White board/chalk board or a Notebook

·  Volunteers (You and yourself)

Procedures:

Objective 1. Discover the Difference Between Utility and Marginal Utility by Using the Law of Diminishing Marginal Utility

In order to understand the Law of Diminishing Marginal Utility it is important to first understand its building blocks. These blocks consist of the concept of utility and marginal utility. The best way to understand these is simply apply them to your real life. Imagine the last time you and your family or some friends ordered a pizza. When the delivery girl or guy dropped it off, that initial smell of melted cheese and hot toppings filled your nose with delight. When you picked up that first piece and took that bite, nothing could satisfy you more, or could it? Does the pizza slice give you as much satisfaction as say, your laptop? This is the idea of utility. The amount of total satisfaction you receive from consuming or utilizing different goods or services differs depending on the good or service.

Although the laptop may provide more satisfaction to you in the long run, would you rather have one more slice of pizza or one more laptop? This is the idea of marginal utility, which is the additional satisfaction you get when you consume one additional “unit” of that good or service. I don’t know about you but I would get more satisfaction from eating one or two more slices of delicious pizza then buying one or two more laptops. The pizza would satisfy my hunger, while more laptops would most likely sit and collect dust (not to mention empty my account). So although one good may have more utility, when it comes to the marginal utility of that object it may drop significantly compared to the other; it is all relative.

The idea of marginal utility brings up this law, which is not surprisingly called the Law of Diminishing Marginal Utility. This explains that as additional “units” of a good or service is consumed its marginal utility decreases. Read the following definitions to refresh your memory of the major building blocks:

Utility – The total satisfaction received from consuming goods and/or services.

Marginal Utility – The additional or extra satisfaction received when consuming one additional “unit” of a good and/or service.

Law of Diminishing Marginal Utility – As additional “units” of a good or service is consumed its marginal utility decreases.

If you want to discover this concept out for yourself, try the following exercise:

1.  Draw a graph in your notebook, labeling the vertical side 'Utility' and the horizontal side 'Number of Candy Bars Consumed'.

2.  Place the numbers one to 10 on the vertical side of the graph.

3.  You are to eat one candy bar and then rate the utility you receive from 1 to 10. (10 is the highest utility)

4.  After each candy bar is consumed, rate your satisfaction and place a point on the graph that represents this.

5.  Continue until you notice a drop in your satisfaction. It is up to you how far you want this drop to go to prove the law.

6.  Get a drink of water.

7.  Examine the graph that you created and look back at the definition of the Law of Diminishing Marginal Utility. Read it aloud and see how it relates to the graph you created.

Activity 1. Law of Diminishing Marginal Utility.

Answer the following questions and save them in a document in which you can print or e-mail to your teacher to prove that you have done the exercise.

a.  What is apparent about the data on the graph? (Declining marginal utility ratings.)

b.  Did your satisfaction go down as you consumed your second and third candy bar?

c.  Why did the marginal utility ratings decline? (As you become satisfied with a good or service, consuming more of that item does not equal as high a marginal utility rate as the item before it.)

d.  At what point did the marginal utility begin to decline? (Usually anything after the first candy eaten.)

e.  Watch a video of a class attempting the same process to further understand the concept: http://youtube.com/watch?v=1K-j8vZ4EiE

f.  Look at this cartoon and then create an example that relates to your own life: http://www.yazadjal.com/images/ch_lawofdmu.gif

g.  Now post this example on this online forum: http://answers.yahoo.com/question/index?qid=20070408073614AAhZwJf

h.  Is it possible that this same decline would occur for other items that we consume? How about a newspaper? Or a bottle of soda? Would the declines for these items differ in any way? (Before answering these questions continue to Activity 2 then come back).

Objective 2. Discover How Different Goods Have Different Levels of Marginal Utility