H06OptimationCSPS - 19 Optimization Optimization Principle...

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1 Optimization Principle - maximize payoff Payoff = Benefit – Cost Optimization Optimization MB MC Do it! MB < MC Don’t do it! MB = MC Well-Being maximized Marginal Analysis – optimal amount Payoff =    C 19 MB P buy more MB < P don’t buy optimal buying: MB = P Buyer Buyer - Individual Behavior Individual Behavior MB 0 2 4 6 8 10 012345 Quantity $ highest price willing to pay Quantity Marginal Benefit 19 27 34 42 51 Fred’s Market Price 19 MB > P MB < P MB = P Market Demand 19 Demand reflects marginal benefits examine all buyers in market quantity demanded for which MB=P 0 2 4 6 8 10 012345678 Quantity Price (Per Unit) D Price Quantity Demanded 91 72 63 45 36 28
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2 Consumer Surplus Consumer Surplus 20 good fortune from participating in the market excess of total benefit over total expenditure marginal benefit minus price for all units Quantity Marginal Surplus 15 23 30 4 5 + + = 8 Fred’s Benefit 9 7 4 2 1 Fred’s Consumer P = 4 Total Benefit Market Price (=4) Consumer Surplus Consumer Surplus 20 Quantity Marginal Benefit 16 24 33 42 Barney’s Marginal Benefit 9 7 4 2 Fred’s
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H06OptimationCSPS - 19 Optimization Optimization Principle...

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