The Logic of Maximizing Behavior and Maximizing in the Marketplace

Key Takeaways

• Economists assume that decision makers make choices in the way that maximizes the value of some objective.
• Maximization involves determining the change in total benefit and the change in total cost associated with each unit of an activity. These changes are called marginal benefit and marginal cost, respectively.
• If the marginal benefit of an activity exceeds the marginal cost, the decision maker will gain by increasing the activity.
• If the marginal cost of an activity exceeds the marginal benefit, the decision maker will gain by reducing the activity.
• The area under the marginal benefit curve for an activity gives its total benefit; the area under the marginal cost curve gives the activity's total cost. Net benefit equals total benefit less total cost.
• The marginal benefit rule tells us that we can maximize the net benefit of any activity by choosing the quantity at which marginal benefit equals marginal cost. At this quantity, the net benefit of the activity is maximized.