MARKETS AND ECONOMIC EFFICIENCY

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MARKETS AND ECONOMIC EFFICIENCY

• Microeconomics Made Easy
• by
• Dr. William Yacovissi
• Mansfield University

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MAXIMIZING BEHAVIOR

• The Logic of Maximizing Behavior
• The assumption of maximizing behavior lies at the
  heart of economic analysis.
• Firms are assumed to maximize economic profit.
•  
• Economic profit is the difference between total
  revenue and total costs.

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MAXIMIZING BEHAVIOR

• Marginal benefit is the amount by which an
  additional unit of an activity increases its
  total benefit.
• Marginal cost is the amount by which an
  additional unit of an activity increases its
  total cost.

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MAXIMIZING BEHAVIOR

• Marginal decision rule Net benefit is maximized
  at the point at which marginal benefit equals
  marginal cost.
• If the marginal benefit of an additional unit of
  an activity exceeds the marginal cost, the
  quantity of the activity should be increased
• If the marginal benefit is less than the marginal
  cost, the quantity should be reduced.

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MAXIMIZING BEHAVIOR
A Problem in maximization The marginal decision
rule can be illustrated with student allocation
of study time. The marginal decision rule can be
illustrated with a graphical analysis. The
marginal benefit curve for most activities slopes
downward, while the marginal cost curve slopes
upward.
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MAXIMIZING BEHAVIOR

• Total benefit equals the area under the marginal
  benefit curve up to the quantity of the activity.
  The area under the marginal cost curve gives
  total cost.
• Net benefit of an activity equals total benefit
  minus total cost.
• Deadweight loss is the amount of net benefit
  given up by a failure to operate where marginal
  benefit equals marginal cost.

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TOTAL AND MARGINAL BENEFITS
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TOTAL AND MARGINAL COST
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MARGINAL DECISION RULE
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NET BENEFITS
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DEADWEIGHT LOSS
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DEADWEIGHT LOSS