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ECON101 Lecture Notes - Public Good, Economic Surplus, Economic Equilibrium

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Lutz- Alexander Busch

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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
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:
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