• Unit 3: Markets and Individual Maximizing Behavior

    In this unit, we examine how markets increase overall welfare via the concepts of consumer and producer surplus. We explore how the concepts of marginal costs and benefits affect a company's decision to make one more, or one less, product.

    We have already learned that, at its most fundamental level, microeconomics is the study of how we make decisions. To expand on this point, we need to distinguish between the either/or and how much decision. This concept is useful when you look more closely at why firms produce certain levels of output, taking opportunity cost and sunk (fixed) cost into consideration.

    This unit concludes with the causes and ramifications of income inequality. While there is much debate about how to address 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 8 hours.

    • Upon successful completion of this unit, you will be able to:

      • explain how the maximization assumption helps us understand the behavior of consumers and firms;
      • apply the concept of consumer surplus, producer surplus, and total surplus to understand the efficient or equitable allocation of resources when there is a change in demand or supply;
      • explain how consumers and firms use marginal benefit and marginal cost to make rational choices;
      • explain how market failures are caused by externalities and identify the role of government intervention in alleviating them;
      • explain how the Lorenz curve and Gini coefficient give insight into a country’s distribution of income and income inequality;
      • distinguish between relative and absolute measures of poverty and explain the major factors that cause and prevent poverty in the US; and
      • illustrate how discrimination in the labor market affects the labor demand and labor supply curves.

    • 3.1: Maximizing in the Market Place

      • The Logic of Maximizing Behavior and Maximizing in the Marketplace Book
        Read these sections revisit the concept of marginal costs and benefits within the context of the consumer's (and the firm's) maximizing behavior. The later pages in this section define two new concepts: consumer surplus and producer surplus. Take a moment to read through the stated learning outcomes, which should be your goals as you read through the chapter. Attempt the "Try It" problem for each section.
      • Consumer and Producer Surplus Book

        Read this article and attempt several practical problems related to consumer and producer surplus by answering the "Try It" quiz questions. Check your answers after you're done.

      • Consumer Surplus Introduction Page

        Watch this video about how to depict consumer surplus with the use of a graph to illustrate the equilibrium point effect on consumer welfare.

      • Demand Curve as Marginal Benefit Curve Page
        Watch this video about the demand curve and how the marginal benefit curve shapes the demand curve.
      • Total Consumer Surplus as Area Page

        Watch this video to learn about about the calculation and depiction of total consumer surplus. Make sure that you understand the concept of total consumer surplus to be as the added benefit that consumers get when they pay a price for something that was below the price they were willing to pay.

      • Producer Surplus Page

        Watch this video about how to depict producer surplus with the use of a graph to illustrate the equilibrium point effect on producer welfare.

      • How Much to Produce? The Story of Marginal Revenue and Marginal Costs Page
        Watch this video about how an apple farmer decides the optimal number of apples to pick. At the end of the video, consider whether or not the government should intervene. Think about which arguments you might make both supporting and disagreeing with the government acting in the market. In 3.2, we will cover specific ways the government might participate in the market.

    • 3.2: When Markets Fail

      • Market Failure Book
        Read this section for a more detailed look at the topic of market failure. Attempt the "Try It” problem before checking your answer.
      • Positive Externalities and Public Goods Book

        Read this chapter to learn more about public goods and the intervention of the government in correcting market failures. Pay attention to the concepts of externalities (both positive and negative externalities).

      • Positive Externalities Page
        Watch this video about how positive externalities can be created with additional production. A good example of a positive externality is education. Getting an education does not just benefit an individual but all of society also benefits from this.
      • Rent Control and Deadweight Loss Page
        Watch this video about how rent control increases deadweight loss. You can think of rent control as a government intervention that affects both consumers and producers by affecting the total consumer and total producer surplus.
      • Taxation and Dead Weight Loss Page
        Watch this video to learn about how taxation affects deadweight loss. Make sure to go back to the main reading in Unit 3.2 to learn more about how taxes affect total consumer surplus and total producer surplus.
      • Percentage Tax on Hamburgers Page
        Watch this video to see how a percentage tax on hamburgers affects deadweight loss. Make sure to distinguish between a "percentage tax", like a sales tax of 8%, and a "constant tax", like a tax of $0.50.
      • Negative Externalities Page
        Watch this video to learn how to depict a negative externality from production when the total societal costs of production is not taken into account when producing. A typical example of a negative externality in production is environmental pollution for the case of factories.
      • Taxes for Factoring in Negative Externalities Page
        Watch this video to learn how to depict a negative externality from production when the total societal costs of production is not taken into account when producing. A typical example of a negative externality in production is environmental pollution for the case of factories.
      • Tragedy of the Commons Page
        Watch this video to learn how to depict a negative externality from production when the total societal costs of production is not taken into account when producing. A typical example of a negative externality in production is environmental pollution for the case of factories.

    • 3.3: Income Inequality

      • Inequality, Poverty, and Discrimination Book
        Read this chapter for a more detailed look at the topic of income inequality and discrimination in the labor markets as these are real examples of market failures. Attempt the "Try It" problems at the end of each section before checking your answers.
      • Measuring Income Inequality Book
        Read this article about the Lorenz Curve, which seeks to measure income inequality. Make sure to answer the "Try It" quiz questions, and check your answers.