COMM 394 Chapter Notes - Chapter 2: Pareto Efficiency, Deadweight Loss, Marginal Revenue
Document Summary
Opportunity cost, marginalism, incentive effects and economic efficiency. Def: the value of the best foregone alternative. Must see if the benefits exceeds the opportunity cost. Expenditures on any projects leave us with fewer resources for alternative projects. The marginal effect of any activity is the effect of doing the activity just a little bit more. E. g. the marginal revenue of the product is the extra revenue gained from selling the additional one unit. The paradox of value: price is not determined by total value but by marginal value. The price consumers are willing to pay for an extra litre of water depends on the marginal value of the next litre. If water is abundant and consumers have as much as they want, then the marginal value of the extra litre is low. Marginalist principle: any policy or activity should be carried out as long as the marginal benefit exceeds the marginal opportunity cost.
