Principles of Economics II 
(Microeconomics)

Efficiency

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Overview.htm

1. Review
Have you any questions on the previous lesson, homework, or materials listed on the previous daily class outline?

2. Course Objectives
List the first four course objectives from your text page 107:
1.

2.

3.

4.

3. Outline

A. A household’s decisions about what to consume depend on two general factors: The household’s budget constraints and its preferences.

B. A household is constrained by its income and the prices of the goods it buys, which are summarized by the household’s budget line, as illustrated in Figure 8.1.

C. The satisfaction from consuming a good can be measured by utility.

1. Like the concept of temperature, where observing the temperature is impossible and the units of measurement are chosen arbitrarily, observing utility and the units used to measure it are selected arbitrarily.

D. Total utility is the entire benefit a person gets from the consumption of goods.

E. Marginal utility is the change in total utility from a one-unit increase in the consumption of a good. The marginal utility from the consumption of a good declines as more of the good is consumed, which reflects the principle of diminishing marginal utility.

A. Economists assume that household’s decisions about what to consume are based on utility maximization; that is, households consume the combination of goods and services that offers the highest possible total utility.

B. Consumer equilibrium is a situation in which the consumer (Lisa in the text) has selected the combination of goods and services that maximize his or her total utility.

C. Total utility is maximized when all the consumer’s income is spent and when the marginal utility per dollar spent is equal for all goods.

1. The marginal utility per dollar of a good equals the marginal utility from the last unit consumed divided by the price of the good.

D. In terms of an equation, utility maximization with two goods, movies and soda, requires that In this equation, is the marginal utility per dollar spent on movies and is the marginal utility per dollar spent on soda.

1. Equating the ratios of marginal utility to price is an example of marginal analysis.

2. The units in which utility is measured do not matter with respect to determining the utility maximizing choice of consumption.

4. PowerPoint Viewgraphs (slides 4 - 14, 15 - 26, 27 - 32, 33 - 39, 40 - 46, 47 - 48, 49 - 55)

5. Discussion Questions and Problems (study guide pages 86-91)
Do the true/false, multiple choice, and problems associated with:

6. Homework

1.  Review Key Concepts pages 81 - 83 in your study guide.
2.  Complete the odd-numbered Questions from your study guide pages 84 - 89 and check your answers on pages 90 - 95.
3.  Compare your class notes and your understanding of the homework Questions with your study partner.

7. Summary

Efficiency : A Refresher

1. The marginal benefit received from a good or service - the benefit of consuming one additional unit - is the value of the good or service to its consumers.

2.  The marginal cost of a good or service - the cost of producing one additional unit - is the opportunity cost of one more unit to its producers.

3.  Resources are used efficiently when marginal benefit equals marginal cost.

4.  If marginal benefit exceeds marginal cost, an increase in production increases the value of production.

5.  If marginal cost exceeds marginal benefit, a decrease in production increases the value of production.

Value, Price, and Consumer Surplus

6.  Marginal benefit is measured by the maximum price that consumers are willing to pay for a good or service.

7.  Marginal benefit determines demand, and a demand curve is a marginal benefit curve.

8.  Value is what people are willing to pay; price is what people must pay.

9.  Consumer surplus equals value minus price, summed over the quantity consumed.

Cost, Price and Consumer Surplus

10.  Marginal cost is measured by the minimum price producers must be offered to increase production by one unit.

11.  Marginal cost determines supply, and a supply curve is a marginal cost curve.

12.  Opportunity cost is what producers pay; price is what producers receive.

13.  Producer surplus equals price minus opportunity cost, summed over the quantity produced.

file: Week 12 Part 1

Love for Econ springs eternal!

Overview.htm