Naked Economics Summer Reading Assignment

AP Economics Summer Reading Assignment

Alice Minkyung Kim

Shenyang International School 1. What is the concept of utility? Utility is “the satisfaction, actual or expected, derived from the consumption of a commodity” (Chand, n.d.). In Naked Economics, it is described as a measurement of people’s well-being (Wheelan, 2010). Utility is a theoretical value that cannot be quantified but only can be compared; in Wheelan’s words, “[p]eople derive utility from something “bigger” than others, not simply big” (2010). Economists use utility to understand and describe behaviors of consumers. Classical economists who believed in that utility could be expressed in numerical terms used an imaginary unit called ‘util’ to measure utility. However,

The aggregate sum of marginal utilities is referred as total utility. A consumer gains the most marginal utility when consuming the first unit of a product; marginal utility decreases “with each additional increase in the consumption” (Heakal, n.d.). The law of diminishing marginal utility is a principle describing such characteristic of marginal utility. To describe such phenomenon in terms of total utility, the total utility rises as one consumes more of a product but at a slowing rate. The total utility reaches its maximum when the marginal utility becomes zero, and the total utility decreases afterwards (“Law of diminishing marginal utility”,

For instance, explicit cost of Ms. Oseola McCarty who “gave away $150,000 to ... [a university] to endow a scholarship for poor students” (Wheelan, 2010), would be the money she donated.

On the other hand, implicit cost is “the imputed value of … resources and services [one owns]” (“Concept of Economic Costs”, n.d.) excluding cash. For example, implicit costs of a company producing a commodity would include factories and machineries it already owns and therefore does not have to spend any extra money for. However, implicit costs are necessary to calculate total cost of an action without understating it.

Real costs are “pains and inconveniences” (“Concept of Economic Costs”, n.d.) one experiences in order to take an action. In Naked Economics, Wheelan states that “there is nothing ―free about concert tickets if you have to stand in line in the rain for six hours to get them.” It is because the “six hours standing in line in the rain” the person spends are the real costs of the concert ticket. Lastly, opportunity cost is the “value of a forgone activity or alternative when another item or activity is chosen” (Wagonner, n.d.). For example, if a student chooses to do homework instead of playing video games, the student’s opportunity cost of working on the homework is playing