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Karen Huff (33)
Chapter 3

Chapter 3 EC238.docx

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Department
Economics
Course
EC238
Professor
Karen Huff
Semester
Fall

Description
EC238 Chapter 3 – Benefits and Costs, Supply and Demand Week 2 Willingness to Pay -The more wealthy a person is, the better they can afford to pay for various goods and services -Willingness to pay (WTP) also reflects ability to pay -As the number of units consumed increases, the WTP for additional units of that good normally declines -Marginal WTP describes the additional willingness to pay of a person for one more unit of a good or service -Total WTP for a given consumption level refers to the total amount a person would be willing to pay to attain that consumption level rather than go without the good entirely -Total WTP is measured as the area under the WTP schedule from zero to the amount to be consumed Demand -An individual demand curve shows the quantity of a good or service that the individual in question would demand at any particular price -A linear demand relationship implies a uniform change in the quantity demanded as the price of the good changes -A non-linear demand curve shows how small increases in price can lead to large reductions in water used when prices start at low levels Aggregate Demand/Willingness to Pay -Relationships should differ somewhat among individuals, because individual tastes and preferences vary -Some individuals are willing to pay more for a given item than are other people -An aggregate demand curve for a market goo is the horizontal summation of the demand curves of all the people typically grouped by geographical region -The principle of aggregating the demand curves of individuals is to pick a price, then add up the quantities demanded -For each price, add up the quantities each consumer wishes to purchase Benefits -The word benefits implies being made better off -We can use ordinary demand curves to determine the benefits of making various things available to people -Demand is often hard to measure when it concerns environmental questions -Demand curves are also critically affected by the ability to pay for something, we well as preferences Cost -Any production process requires a variety of productive inputs – labour, machinery of various descriptions, energy, raw materials, waste handling equipment, etc. Opportunity Cost -The opportunity cost of producing something consists of the maximum value of other outputs we could and would have produced had we not used the resources to produce the item in question -Opportunity costs include out-of-pocket costs, but are wider than this -Ex. People who volunteer their time to clean up trash in parks have an opportunity cost: they could have been working somewhere else at that time for wages -Opportunity costs are relevant in any situation where a decision must be made about using productive resources for one purpose rather than another -Shadow prices measure what the costs would be if markets operated perfectly EC238 Chapter 3 – Benefits and Costs, Supply and Demand Week 2 Cost
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