• Unit 4: Markets and Maximizing Individual Behavior

    You are now familiar with the workings of the market. You understand how changes in demand or supply affect prices and quantities for firms and consumers. In this unit, we revisit the demand and supply model to explore economic efficiency. Economic efficiency occurs if "the optimal amount of each good and service is produced and consumed."

    We introduce the concepts of consumer and producer surplus to analyze how free markets increase overall welfare. Then, we apply these concepts to analyze the effects of price controls on prices, quantities, and market efficiency.

    The market, on its own, does not always allocate resources efficiently. Economists talk about market failure when it falls short. We analyze how the government can alleviate these market failures.

    This unit concludes with an introduction to the causes and ramifications of income inequality. While much debate exists on long-term inequality, economists can objectively measure the problem's scope and offer options to manage this economic phenomenon. Protracted poverty and inequality can cause long-term harm to an economy's development.

    Completing this unit should take you approximately 4 hours.

    • 4.1: Maximizing in the Market Place: Consumer Surplus, Producer Surplus and Social Surplus

      Let's say Beyoncé will perform at a stadium near your hometown in a few months. You absolutely adore her music. How much are you willing to pay for a ticket to go to her concert? Imagine you are willing to pay $150, and you find a ticket for $100. What is the economic significance of this situation? Why aren't tickets being sold for less than $100? In this section, we introduce and explore the concepts of consumer surplus and producer surplus as tools for measuring economic efficiency.

    • 4.2: Price Controls and Efficiency

      In January 2022, the price of eggs spiraled out of control in the united States. After so many years of limiting my scrambled eggs breakfast to control my cholesterol levels, it turned out it was fine to eat one egg per day as long as you could afford it! Jokes aside, should the federal government have imposed a maximum price for eggs?

      In this section, we use the demand and supply framework, along with the analysis of efficiency based on total surplus, to assess whether adopting price controls (such as price floors and price ceilings) is justified. We introduce another new concept to gain a comprehensive understanding of the impact of price controls: deadweight loss. This is an incredibly valuable concept despite its ominous name.

    • 4.3: When Markets Fail: Externalities and Introduction to Public Goods

      Markets are usually good at efficiently using resources, but sometimes they fail. For example, if a market isn't competitive or property rights are unclear, it can lead to poor decisions. Many companies have benefited from government support for riskier projects. One big issue that can cause markets to fail is externalities, where decisions by companies or individuals affect others who don't have a say in the matter.

    • 4.4: Poverty, Income Inequality, and Discrimination in the Labor Market

      In section 4.3, we analyzed the concept of market failure and its impact on private decision-making. Although private decisions are rational and driven by self-interest, they may not always lead to the maximization of net benefits for a specific activity. In this section, we focus on poverty, income inequality, and discrimination in the labor market as examples of market failures. We also examine how economists define poverty and measure inequality.

      The labor market approach introduced in Unit 2 does not account for situations such as the impact on families when a major local employer closes down. This framework also overlooks barriers to equitable labor market participation. In this section, we address the resulting income inequality.

    • Unit 4 Assessment

      • Receive a grade