The Logic of Maximizing Behavior and Maximizing in the Marketplace
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.
Maximizing in the Marketplace
- In a competitive system in which the interaction of demand and supply determine prices, the corresponding demand and supply curves can be considered marginal benefit and marginal cost curves, respectively.
- An efficient allocation of resources is one that maximizes the net benefit of each activity. We expect it to be achieved in markets that satisfy the efficiency condition, which requires a competitive market and well-defined, transferable property rights.
- Consumer surplus is the amount by which the total benefit to consumers from some activity exceeds their total expenditures for it.
- Producer surplus is the amount by which the total revenues of producers exceed their total costs.
- An inequitable allocation of resources implies that the distribution of income and wealth is inequitable. Judgments about equity are normative judgments.