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

MAXIMIZING BEHAVIOR The Logic of Maximizing Behavior l The assumption of maximizing behavior lies at the heart of economic analysis. l Firms are assumed to maximize economic profit. l Economic profit is the difference between total revenue and total costs.

MAXIMIZING BEHAVIOR l Marginal benefit is the amount by which an additional unit of an activity increases its total benefit. l Marginal cost is the amount by which an additional unit of an activity increases its total cost.

MAXIMIZING BEHAVIOR l Marginal decision rule: Net benefit is maximized at the point at which marginal benefit equals marginal cost. l If the marginal benefit of an additional unit of an activity exceeds the marginal cost, the quantity of the activity should be increased l If the marginal benefit is less than the marginal cost, the quantity should be reduced.

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.

MAXIMIZING BEHAVIOR l 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. l Net benefit of an activity equals total benefit minus total cost. l Deadweight loss is the amount of net benefit given up by a failure to operate where marginal benefit equals marginal cost.

TOTAL AND MARGINAL BENEFITS Total Benefits Marginal Benefits

TOTAL AND MARGINAL COST Total Costs Marginal Costs

MARGINAL DECISION RULE

NET BENEFITS

DEADWEIGHT LOSS