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MARKETS AND ECONOMIC EFFICIENCY
Microeconomics Made Easy
by
Dr. William Yacovissi
Mansfield University
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.
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.
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.
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.
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.
TOTAL AND MARGINAL BENEFITS
Total Benefits
Marginal Benefits
18 18
32 14
42 10
46 6
48 2
TOTAL AND MARGINAL COST
Total Costs
Marginal Costs
2 2
8 6
18 10
32 14
50 18
MARGINAL DECISION RULE
NET BENEFITS
DEADWEIGHT LOSS
DEADWEIGHT LOSS
