Foundations of Microeconomics
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F oundations of
Microeconomics
SEVENTH edition
R
obin Bade • Michael Parkin
SEVENTH edition
Bade • Parkin
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a sample test online, MyEconLab gives you targeted f­eedback and a personalized Study Plan to identify
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Part 2 • A CLOSER LOOK AT MARKETS
Marginal Benefit
Marginal benefit is the benefit that people receive from consuming one more unit of
a good or service. People’s preferences determine marginal benefit and we can mea­
sure the marginal benefit from a good or service by what people are willing to give
up to get one more unit of it.
The more we have of any good or service, the smaller is our marginal benefit
from it—the principle of decreasing marginal benefit. Think about your own marginal
benefit from pizza. You really enjoy the first slice. A second slice is fine, too, but
not quite as satisfying as the first one. But eat three, four, five, six, and more slices,
and each additional slice is less enjoyable than the previous one. You get dimin­
ishing marginal benefit from pizza. The more pizza you have, the less of some
other good or service you are willing to give up to get one more slice.
Figure 6.1 illustrates the economy’s marginal benefit schedule and marginal
benefit curve for pizza. The schedule and curve show the same information. In the
schedule and on the curve, the quantity of other goods that people are willing to
give up to get one more pizza decreases as the quantity of pizza available increases.
Marginal Cost
To achieve allocative efficiency, we must compare the marginal benefit from
pizza with its marginal cost. Marginal cost is the opportunity cost of producing
one more unit of a good or service (see p. 48) and is measured by the slope of the
production possibilities frontier (see pp. 102–103). The marginal cost of a good
­increases as the quantity produced of that good increases.
■
Figure 6.1
MyEconLab Animation
Marginal Benefit from Pizza
The table and the graph show the
­marginal benefit from pizza.
Possibility A and point A tell us that if
2,000 pizzas a day are produced, peo­
ple are willing to give up 15 units of
other goods for a pizza. Each point A,
B, and C in the graph represents the
possibility in the table identified by
the same letter.
The line passing through these points
is the marginal benefit curve. The
­marginal benefit from pizza decreases
as the quantity of pizza available
increases.
Marginal benefit (units of other goods per pizza)
20
A
15
Marginal
benefit
curve
B
10
C
5
0
2
4
6
8
Quantity (thousands of pizzas per day)
Quantity (thousands of pizzas per day)
Willingness to give up
(units of other goods per pizza)
Possibility
M06_BADE8362_07_GE_C06.indd 180
2
15
4
10
6
5
A
B
C
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Chapter 6 • Efficiency and Fairness of Markets
181
Figure 6.2 illustrates the economy’s marginal cost schedule and marginal cost
curve. In the schedule and along the curve, which show the same information, the
quantity of other goods that people must give up to get one more pizza increases as
the quantity of pizza produced increases.
We can now use the concepts of marginal benefit and marginal cost to dis­
cover the efficient quantity of pizza to produce.
Efficient Allocation
The efficient allocation is the highest-valued allocation. To find this allocation, we
compare marginal benefit and marginal cost.
If the marginal benefit from pizza exceeds its marginal cost, we’re producing
too little pizza (and too many units of other goods). If we increase the quantity of
pizza produced, we incur a cost but receive a larger benefit from the additional
pizza. Our allocation of resources becomes more efficient.
If the marginal cost of pizza exceeds its marginal benefit, we’re producing too
much pizza (and too little of other goods). Now if we decrease the quantity of
pizza produced, we receive a smaller benefit from pizza but save an even greater
cost of pizza. Again, our allocation of resources becomes more efficient.
Only when the marginal benefit and marginal cost of pizza are equal are we
allocating resources efficiently. Figure 6.3 on the next page illustrates this efficient
allocation and provides a graphical summary of the above description of alloca­
tive efficiency.
■
Figure 6.2
MyEconLab Animation
Marginal Cost of Pizza
Marginal cost (units of other goods per pizza)
20
Marginal
cost curve
15
10
C
Points A, B, and C in the graph repre­
sent the possibilities in the table. The
marginal cost curve shows that the
marginal cost of a pizza increases as the
quantity of pizza produced increases.
B
5
The table and the graph show the marginal cost of a pizza. Marginal cost is the
opportunity cost of producing one
more unit. It is derived from the PPF
and is measured by the slope of the
PPF.
A
0
2
4
6
8
Quantity (thousands of pizzas per day)
Quantity (thousands of pizzas per day)
Must give up
(units of other goods per pizza)
Possibility
M06_BADE8362_07_GE_C06.indd 181
2
5
4
10
6
15
A
B
C
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182
■
Part 2 • A CLOSER LOOK AT MARKETS
Figure 6.3
MyEconLab Animation
The Efficient Quantity of Pizza
Production efficiency occurs at all points
on the PPF, but allocative efficiency
­occurs at only one point on the PPF.
➊ When 2,000 pizzas are produced
in part (a), the marginal benefit
from pizza exceeds its marginal
cost in part (b). Too few pizzas are
being produced. If more pizzas and
less of other goods are produced,
the value of production increases
and resources are used more effi-­
ciently.
➋ When 6,000 pizzas are produced
in part (a), the marginal cost of a
pizza exceeds its marginal benefit
in part (b). Too many pizzas are
being produced. If fewer pizzas and
more of other goods are pro­
duced, the value of production
increases and resources are used
more efficiently.
➌ When 4,000 pizzas a day are pro­
duced in part (a), the marginal cost
of a pizza equals its marginal bene­
fit in part (b). The efficient quantity
of pizzas is being produced. It is
not possible to get greater value
from the economy’s scarce
­resources. If one less pizza and
more other goods are produced,
the value of the lost pizza exceeds
the value of the additional other
goods, so total value falls. And if
one more pizza and less other
goods are produced, the value of
the gained pizza is less than the
value of the lost other goods, so
again total value falls.
Other goods (thousands of units per day)
70
Too few
pizzas
60
Allocative
efficiency
50
40
30
Too many
pizzas
20
10
PPF
0
2
4
8
6
Quantity (thousands of pizzas per day)
(a) On the PPF
Marginal benefit and marginal cost
(units of other goods per pizza)
20
Marginal benefit exceeds
marginal cost—produce
more pizzas
Marginal cost exceeds
marginal benefit—produce
fewer pizzas
MC
15
Marginal benefit
equals marginal
cost—efficient
quantity of pizzas
10
5
MB
0
2
4
6
8
Quantity (thousands of pizzas per day)
(b) Marginal benefit equals marginal cost
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183
Chapter 6 • Efficiency and Fairness of Markets
Checkpoint 6.1
MyEconLab
Study Plan 6.1
Key Terms Quiz
Describe the alternative methods of allocating scarce resources
and define and explain the features of an efficient allocation.
Practice Problems
1. Which method is used to allocate the following scarce resources?
• Campus parking space between student areas and faculty areas
• A spot in a restricted student parking area
• Textbooks
• Host city for the Olympic Games
Use Figure 1, which shows a nation’s PPF, and Table 1, which shows its
marginal benefit and marginal cost schedules, to work Problems 2 and 3.
2. What is the marginal benefit from bananas when 1 pound of bananas is
grown? What is the marginal cost of growing 1 pound of bananas?
3. On Figure 1, mark two points: Point A at which production is efficient but
too much coffee is produced for allocative efficiency; and point B, the point
of allocative efficiency.
In the News
AC/DC’s “Black Ice” tour breaks records down under
The 40,000 tickets for the March 6 gig sold out in seven minutes—a record.
Many people who camped out overnight missed getting a ticket.
Source: WAToday, May 25, 2009
What method was used to allocate AC/DC concert tickets? Was it efficient?
Solutions
Figure 1
Coffee (pounds)
10
9
8
7
6
5
4
3
PPF
2
1
1
0
Solution to In the News
4
3
Bananas (pounds)
Table 1 Marginal Benefit
And Marginal Cost
Willing to
give up
Must give
up
Bananas (pounds of coffee per pound
(pounds)
of bananas)
1
2
3
Solutions to Practice Problems
1. Campus parking is allocated by command. The spot in a restricted student
parking area is allocated by first-come, first-served. Textbooks are allocated
by market price. The Olympic Games’ host city is allocated by contest.
2. The marginal benefit from 1 pound of bananas is 3 pounds of coffee.
Marginal benefit is the amount of coffee that the nation is willing to give up
to get one additional pound of bananas. The marginal cost of growing 1
pound of bananas is 1 pound of coffee. Marginal cost is the amount of coffee that the nation must give up to get one additional pound of bananas.
3. Point A on Figure 2 shows production efficiency (on the PPF) but not allocative
efficiency because from Table 1 marginal benefit from bananas exceeds the
marginal cost—too few bananas are produced. Point B is the point of alloca­
tive efficiency: It is on the PPF and marginal benefit equals marginal cost.
2
3
2
1
1
2
3
Figure 2
Coffee (pounds)
10
A
9
8
B
7
6
5
4
3
PPF
2
1
0
1
2
4
3
Bananas (pounds)
The concert organizer used first-come, first-served to allocate tickets. The alloca­
tion was efficient if the concert-goer’s willingness to pay (the ticket price
plus the opportunity cost of time spent in the line), which is also the marginal
benefit, equaled the organizer’s marginal cost of providing one more seat.
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Part 2 • A CLOSER LOOK AT MARKETS
6.2 Value, Price, and Consumer Surplus
MyEconLab Snapshot
To investigate whether a market is efficient, we need to understand the connection
between demand and marginal benefit and between supply and marginal cost.
Demand and Marginal Benefit
In everyday life, when we talk about “getting value for money,” we’re distinguish­
ing between value and price. Value is what we get, and price is what we pay. In eco­
nomics, the everyday idea of value is marginal benefit, which we measure as the
maximum price that people are willing to pay for another unit of the good or ser­
vice. The demand curve tells us this price. In Figure 6.4(a), the demand curve shows
the quantity demanded at a given price—when the price is $10 a pizza, the quantity
demanded is 10,000 pizzas a day. In Figure 6.4(b), the demand curve shows the max­
imum price that people are willing to pay when there is a given quantity—when
10,000 pizzas a day are available, the most that people are willing to pay for the
10,000th pizza is $10. The marginal benefit from the 10,000th pizza is $10.
A demand curve is a marginal benefit curve. The demand curve for
pizza tells us the dollars’ worth of other goods and services that
people are willing to forgo to consume one more pizza.
■
Figure 6.4
MyEconLab Animation
Demand, Willingness to Pay, and Marginal Benefit
Price (dollars per pizza)
Price (dollars per pizza)
20
20
15
15
10
10
5
Quantity of pizzas
demanded at $10
a pizza
5
Maximum price
willingly paid for
the 10,000th pizza
D = MB
D
0
5
10
15
20
Quantity (thousands of pizzas per day)
(a) Price determines quantity demanded
➊ The demand curve for pizza, D, shows the quantity of pizza
demanded at each price, other things remaining the same. At
$10 a pizza, the quantity demanded is 10,000 pizzas a day.
M06_BADE8362_07_GE_C06.indd 184
0
5
10
15
20
Quantity (thousands of pizzas per day)
(b) Quantity determines willingness to pay
➋ The demand curve shows the maximum price willingly paid
(marginal benefit) for a given quantity. If 10,000 pizzas are avail­
able, the maximum price willingly paid for the 10,000th pizza is
$10. The demand curve is also the marginal benefit curve MB.
12/07/14 10:56 AM