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Chapter 5

ECO 211 Chapter 5.pdf

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ECO 211

Chapter 5: Efficiency Efficiency:ARefresher According to economists, allocative efficiency means the resources have been used to produce the goods and services that people value the most. Efficiency:ARefresher Marginal benefit is the benefit that a person receives from consuming one more unit of a good or service measured as the maximum amount that a person is willing to give up for one additional unit Principle of decreasing marginal benefit marginal benefit decreases as consumption increases Efficiency:ARefresher Marginal cost is the opportunity cost of producing one more unit of a good or service. measured as the value of the best alternative foregone Principle of increasing marginal cost marginal cost increases as the quantity produced increases Downward sloping demand curve Upward sloping supply curve Efficiency and Inefficiency Allocative efficiency depends upon a comparison of marginal cost and marginal benefit. Three possibilities marginal benefit exceeds marginal cost marginal cost exceeds marginal benefit marginal benefit equals marginal cost Efficiency and Inefficiency What is the economically efficient quantity of pizza? The Efficient Quantity of Pizza The Efficient Quantity of Pizza Value, Price, and Consumer Surplus What is meant by “Value”? Value of an item is the same thing as its marginal benefit Marginal benefit - the maximum price people are willing to pay for an additional unit Willingness determines demand Value point on the demand curve Value = marginal benefit Consumer surplus is the extra value you get when you buy a good or service Consumer Surplus Consumer surplus is the value of a good minus the price paid for it. if a person buys something for less than they are willing to pay for it, a consumer surplus exists AConsumer’s Demand and Consumer Surplus Area of triangle: (1/2)b*h ½*20*1 = 10 USD Consumer surplus Total value to consume or 20 slices of pizza: 40 USD, they spent 30 USD, so they got an extra value of 10 USD Area of Trapezoid: (1/2)*(base 1 + base 2)*h If price is 2.00 USD: consumer surplus is 2.50 USD Cost, Price, and Producer Surplus Cost vs. Price Cost is what th
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