Overview
This lecture explains how the concepts of marginal benefit and marginal cost relate to the market for chocolate, connecting them to the demand and supply curves, and introduces the idea of allocative efficiency and deadweight loss.
Demand and Marginal Benefit
- Marginal benefit is the extra benefit received from consuming one additional unit of a good.
- At low quantities, marginal benefit is high because initial demand is strong.
- As more chocolate becomes available, marginal benefit typically decreases.
- The demand curve can be viewed as the marginal benefit curve, showing price versus quantity.
- Area under the marginal benefit curve represents the total benefit gained by the market.
Supply and Marginal Cost
- Marginal cost is the extra cost incurred to produce one additional unit of a good.
- Initial units are produced cheaply using readily available resources.
- As production increases, marginal cost rises due to the need for more expensive resources.
- The supply curve can be viewed as the marginal cost curve, showing cost versus quantity.
- Area under the marginal cost curve up to a quantity gives the total production cost.
Market Surplus and Efficiency
- Surplus benefit (total surplus) is the area between the marginal benefit and marginal cost curves up to a given quantity.
- Producers supply chocolate as long as marginal benefit exceeds marginal cost.
- The allocatively efficient quantity (Q₀) is where marginal benefit equals marginal cost.
- At allocative efficiency, total surplus is maximized and there is no incentive to change quantity.
Deadweight Loss
- If quantity is less than efficient (Q₁), marginal benefit exceeds marginal cost and some surplus is lost (deadweight loss).
- If quantity is greater than efficient (Q₂), marginal cost exceeds marginal benefit, creating negative surplus (also deadweight loss).
- Deadweight loss occurs whenever market quantity differs from the allocatively efficient quantity.
Key Terms & Definitions
- Marginal Benefit — the additional benefit from consuming one more unit of a good.
- Marginal Cost — the additional cost of producing one more unit of a good.
- Allocatively Efficient — the quantity where marginal benefit equals marginal cost, maximizing total surplus.
- Total Surplus — the difference between total benefit and total cost in the market.
- Deadweight Loss — lost total surplus when market quantity is not allocatively efficient.
Action Items / Next Steps
- Review how supply and demand curves represent marginal cost and marginal benefit.
- Understand the causes and implications of deadweight loss.