econ 211 lecture 3

econ 211 lecture 3 - Econ 211 Lecture 3 Patrick McLaughlin...

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Econ 211 Lecture 3 Patrick McLaughlin Lecture 3: Introduction to the Demand Curve, Review of Ceteris Paribus First, let’s review some of what we’ve learned. According to the principles of diminishing marginal benefit and rising marginal cost, we can determine the optimal quantity of consumption of a good given an individual’s cost and benefit schedules . Furthermore, if the cost and/or benefit schedule changes in a consistent manner, we can predict what will happen to that optimal quantity. Consider the following example: The following chart gives my marginal benefit (MB) and marginal cost (MC) of consuming burritos at Supertaco. All relevant costs and benefits are included and measured in dollars. MB and MC entries are made on the lines between the quantity rows to reflect that MB is the change in total benefit when adding one more unit and MC is the change in total cost when adding one more unit. Quantity MB Total Benefit MC Total Cost 0 0 0 $10 $4 1 $10 $4 $9 $6 2 $19 $10 $8 $8 3 $27 $18 $7 $10 4 $34 $28 $6 $12 5 $40 $40 $7 $14 6 $47 $54 How many burritos should I eat? I will eat whatever quantity maximizes my net benefit , which equals total benefit minus total cost . Let’s add a column for net benefit (NB): Quantity MB Total Benefit MC Total Cost NB 0 0 0 0 $10 $4 1 $10 $4 $6 $9 $6 2 $19 $10 $9 $8 $8 3 $27 $18 $9 $7 $10 4 $34 $28 $6 $6 $12 5 $40 $40 0 $7 $14 6 $47 $54 -$7 Page 1 of 5 Updated: 5/12/2009
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Econ 211 Lecture 3 Patrick McLaughlin Assuming I can consume only entire burritos (no half-burritos possible), then I would have the same, maximum net benefit of $9 at quantity of 2 and 3. The marginal benefit of eating that third one equals exactly the marginal cost of eating that third one, so I would be indifferent about having the third burrito. Note that if we didn’t assume away
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This note was uploaded on 04/09/2008 for the course ECON 211 taught by Professor Johnson during the Spring '07 term at Clemson.

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econ 211 lecture 3 - Econ 211 Lecture 3 Patrick McLaughlin...

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