Survey of Economics, Version 2.
0
Libby Rittenberg & Tim Tregarthen
PUBLISHED BY:
FLATWORLD
©2017 BY FLATWORLD. ALL RIGHTS RESERVED. YOUR USE OF THIS WORK IS SUBJECT TO THE LICENSE
AGREEMENT AVAILABLE HERE.
USED, MODIFIED, OR REPRODUCED IN ANY FORM BY ANY MEANS EXCEPT AS EXPRESSLY PERMITTED
UNDER THE LICENSING AGREEMENT.
CHAPTER 5
Markets, Maximizers, and Efficiency
1. The Logic of Maximizing Behavior
Learning Objectives
1. Explain the maximization assumption that economists make in
explaining the behavior of consumers and firms.
2. Explain and illustrate the concepts of marginal benefit and marginal
cost and apply them to understanding the marginal decision rule.
1. The Logic of Maximizing Behavior
Economic
Profit
• The difference between total revenue and total cost
1.1 The Analysis of Maximizing Behavior
• Net benefit is the total benefit of an activity minus its opportunity
cost.
• Marginal benefit is the amount by which an additional unit of an
activity increases its total benefit.
• Marginal cost is the amount by which an additional unit of an activity
increases its total cost.
• The marginal decision rule states that if the marginal benefit of an
additional unit of an activity exceeds the marginal cost, the quantity of
the activity should be increased. If the marginal benefit is less than
the marginal cost, the quantity should be reduced.
• A constraint is a boundary that limits the range of choices that can
be made.
Figure 5.1 The Benefits of Studying
Economics
Figure 5.2 The Marginal Benefits of
Studying Accounting
Figure 5.3 The Marginal Benefits and Marginal
Costs of Studying Economics
Figure 5.4 The Benefits and Costs of
Studying Economics
Figure 5.5 The Marginal Benefit Curve
and Total Benefit
Deadweight Loss
Deadweight Loss
• The loss in net benefits resulting from a failure to
carry out an activity at the most efficient level
Figure 5.6 Using Marginal Benefit and Marginal Cost
Curves to Determine Net Benefit
2. Maximizing In the Marketplace
Learning Objectives
1. Explain what is meant by an efficient allocation of resources in an
economy and describe the market conditions that must exist to
achieve this goal.
2. Define consumer and producer surplus.
3. Discuss the relationship between efficiency and equity.
2. Maximizing In the Marketplace
• Efficient allocation of resources is when the net benefits of all
economic activities are maximized.
2.1 Achieving Efficiency
• The role of property rights
• Property rights are a set of rules that specify the ways in which an owner can
use a resource.
• An exclusive property right is a property right that allows its owner to prevent
others from using the resource.
• A transferable property right is a property right that allows the owner of a
resource to sell or lease it to someone else.
Figure 5.7 Demand and Supply and
the Efficiency Condition
2.2 Producer and Consumer Surplus
• Consumer surplus is the amount by which the total benefits to
consumers from consuming a good exceed their total expenditures
on the good.
• Producer surplus is the difference between the total revenue
received by sellers and their total cost.
Figure 5.8 Consumer and Producer Surplus
Figure 5.9 Net Benefit: The Sum of Consumer
and Producer Surplus
2.3 Efficiency and Equity
• In a market that satisfies the efficiency condition, an efficient
allocation of resources will emerge from any particular distribution of
income
• Different income distributions will result in different, but still efficient,
outcomes
• Whatever distribution society chooses, an efficient allocation of
resources is still preferred to an inefficient one
3. Market Failure
Learning Objectives
1. Explain what is meant by market failure and the conditions that may
lead to it.
2. Distinguish between private goods and public goods and relate them
to the free rider problem and the role of government.
3. Explain the concepts of external costs and benefits and the role of
government intervention when they are present.
4. Explain why a common property resource is unlikely to be allocated
efficiently in the marketplace.
3. Market Failure
Market Failure
• Occurs when private decision makers in the
marketplace fail to achieve an efficient allocation of
scarce resources
3.2 Public Goods
• A public good is a good for which the cost of exclusion is prohibitive
and for which the marginal cost of another user is positive.
• A private good is a good for which exclusion is possible and for
which the marginal cost of another user is positive.
• Free riders are people or firms that consume a public good without
paying for it.
Figure 5.10 Public Goods and Market Failure
3.3 External Costs and Benefits
• An external cost is a cost imposed on a third party (those outside of
the market exchange).
• An external benefit is an action taken by a person or firm that
creates benefits for others in the absence of any market agreement.
Figure 5.11 External Costs
3.4 Common Property Resources
• Common property resources are resources for which no property
rights have been defined
• The difficulty with common property resources
• Individuals may not have adequate incentives to engage in efforts to preserve
or protect them