MARKETS AND ECONOMIC EFFICIENCY

1. MARKETS AND ECONOMIC EFFICIENCY Microeconomics Made Easy by Dr. William Yacovissi Mansfield University

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. Total Benefits Marginal Benefits 18 18 32 14 42 10 46 6 48 2 TOTAL AND MARGINAL BENEFITS

8. Total Costs Marginal Costs 2 2 8 6 18 10 32 14 50 18 TOTAL AND MARGINAL COST

9. MARGINAL DECISION RULE

10. NET BENEFITS

11. DEADWEIGHT LOSS

12. DEADWEIGHT LOSS