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Econ 101 September 26 - o Excess of total benefit over...

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Econ 101 September 26, 2011 Optimization Principle – maximize payoff Find the optimal level, x, of an action or good Total payoff(x) =total benefit(x) – total cost(x) Marginal analysis – optimal amount of x (mb marginal benefit mc marginal cost Examine current situation, say we are at x Consider an increase to x + deltax Suppose MB decreases and MC increases as x increases Keeping increasing x until the mb = mc Buyer – individual behavior Marginal benefit – additional benefit from another nit o Measured by maximum price willing to pay o Decreases as consumption increases Optimal buying: BP = P MBP greater than or equal to P ---- buy ore Mb < p --- don’t buy pay less Demand reflects marginal benefits Consumer surplus Good fortune from participating in the market o Excess of total benefit over total expenditure o Marginal benefit minus price for all units Good fortune from participating in the market
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Unformatted text preview: o Excess of total benefit over total expenditure o Marginal benefit minus price for all units Seller – individual behavior • Marginal cost- additional cost of producing another unit o Larger as more is sold • Optimal selling P = MC • P greater than mc sellmore • P less than MC don’t sell Market supply • Supply reflects marginal costs o Examine individual sellers’ supply o Quantity supplied is sum of individual supplies Good fortune from participating in the market • Excess of total revenue over variable cost • Price minus marginal cost for all units Pareto efficient – cannot make someone better off without making someone else worse off at the same time Allocative efficiency – MB = MC Production matches tastes Distributive fficency – MB = fr all buyers No improvement with redistribution Productive efficiency MB- for all sellers Cannot produce at lower cost...
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