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ECON 101 (318)
Lecture

ch 6 econ.docx

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Department
Economics
Course
ECON 101
Professor
Lutz- Alexander Busch
Semester
Fall

Description
Logic of Maximizing Behaviour:  Individuals maximize: o Pick some objective and then seek to maximize its value  Economist pay special attention to 2 groups of maximizers: o Consumers:  Seek to maximize utility (value) o Firms:  Seek to maximize economic profit: Difference between total revenue and total cost (cost- opportunity cost)  Models are different from the real world o People’s behavior is broadly consistent with a model  Activities of consumers and firms have benefits and opportunity costs: o Given the benefits and costs they will make choices that maximize the net benefit: The total benefit of an activity minus its opportunity cost  Economist maintain that in order to maximize net benefit, consumers and firms evaluate each activity at the margin (consider additional cost, additional benefits)  Marginal benefit: o Amount by which an additional unit of an activity increases its total benefit  Marginal cost: o Amount by which an additional unit of activity increases its total cost  Determine the quality of any activity that will maximize its net benefits, we apply the marginal decision rule: (forms the foundation for the structure economist use to analyze all choices) o If the marginal benefit of an additional unit of activity exceeds the marginal cost, the quantity of the activity should be increased o If the marginal benefit is less than the marginal cost, the quality should be reduced  Net benefit is maximized at the point at which marginal benefits equal marginal cost  Maximizing choices must be made within the limits imposed by some constraints: Boundary that limits the range of choices can be made  Marginal benefit curve: o Slopes down (demand) o Generally fall as quantities increase  Marginal cost curve: o Slopes upward (supply) o More time a person devotes to one activity, less time available for another o More one reduces the second activity, greater the forgone marginal benefits  Maximize net benefit: o Marginal benefit = marginal cost (equilibrium)  Smaller the intervals that we choose, the closer the areas under the marginal benefit and marginal cost curves will be to total benefit and total cost  Area under marginal benefit curve = total benefit of the quantity  Area under marginal cost curve = total cost of the quantity  Dead weight lose: o Loss in net benefits resulting from a failure to carry out an activity at the most efficient level Maximizing in the market place:  Net benefits of all economic activities are maximized, economist say the allocation of resource is efficient: allocation of resources when the net benefits of all economic activities are maximized  Efficient in production when the company has a comparative advantage o Producing as much as possible with the factor of production available o Efficiency of goods and services  Smoothly functioning market required that: o Producers possess property rights (set of rules that specify that ways in which an owner can use a resource) to the goods and services they produce o Consumers possess property rights to the goods and services they buy  Property rights form the basis for all market exchange: o Property rights might exist if an exchange is to occur and is essential to the efficient allocation of resources o Exchange is the process through which economic efficiency is achieved o Property rights vary for different resources  Two characteristics are required if the market place is to achieve an efficient allocation of resources: o Property rights must be exclusive:  Property rights that allow its owner to prevent others from using the resource o Property rights must be transferable:  Property right that allows the owners of a resource to seller or lease it to someone else (absence of transferability, no exchange can occur)  Efficiency condition: o Situation that requires a competitive market with well-defined and transferable property rights  Seller sold it to you, because they expect that the money you paid would be more worth more than the value of keeping item  Exchanges in the market place have a remarkable property: o Both buyers and sellers expect to em
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