This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: 1 Chapter 5 Efficiency and Social Interest Marginal Benefit- the extra happiness that a person receives from consuming one more unit of a good or service. Marginal Cost- the additional cost (including opportunity cost) of producing one more unit of a good or service. Pareto Efficiency (Allocative Efficiency)- A distribution of goods and services is con- sidered Pareto Efficient if it is not possible to make someone better off without making someone else worse off. Willingness to Pay and Demand Since we derived the demand curve by asking the question: If the price of the product is $x how many units would you like to buy? Therefore, the demand curve is the maximum amount that an individual is willing to pay for the last unit of a good or service consumed. The maximum amount they are willing to pay for a particular unit is equal to the marginal benefit they receive from consuming that unit. Consumer Surplus (CS) Since people are not forced to pay the maximum price they are willing to pay for each unit, they receive a consumer surplus. The value of a good minus the price paid for each unit consumed. Consuming Infinitely Divisible Units Vs. Whole/Partial Units Products are sold in either infinitely divisible units or whole units only. Products like gasoline can be purchased in the exact amount you would like; these are infinitely divisible. Other products can only be purchased in specific increments. Its not possible to purchase half a bottle of soda or half of a slice of pizza. 2 Consumer Surplus with Whole Units CS n = n X i =1 ( MB i- P ) Assume Q D = 10 - P and the P = $7 If the price of the product is $7 then the consumer will buy 3 units. The individual is willingIf the price of the product is $7 then the consumer will buy 3 units....
View Full Document
- Spring '10