Download Marginal costs and benefits

To do today:
Finish cross elasticity and income elasticity
Inequality Efficiency: Marginal costs and benefits
See my email for the reading assignments from Akerlof and
Schiller for the discussions starting next Wednesday.
No homework this weekend. Next due date February 17th.
© 2011 Pearson Education
Income elasticity of demand
A measure of the extent to which the demand for a good
changes when income changes, other things remaining
the same.
Income
elasticity of
demand
=
% change in Qd
% change in income
Income elasticity of demand for
chocolate: Who has the biggest sweet
tooth?
Total consumption
l  USA 0.79
l  Germany 0.39
l  United Kingdom 0.44
l  France 0.60
l  Japan 0.08
l  Switzerland 1.06
Reference: Henri Jason Trends in cocoa and chocolate
consumption with particular reference to developments in
the major markets. Malaysian International Cocoa
100000
Singapore
Hong Kong China
Airline travel (000) per capita
10000
New Zealand
Australia
Switzerland
US
Netherlands
Canada
Denmark
UK
Ecuador
Norway
France
Spain
Japan
Finland
Malaysia
Belgium
Greece
Ireland
Saudi Arabia
Germany
Sweden
Portugal
Austria
Thailand
Korea Rep
Panama
Dominican Rep
Italy
S. Africa
Lebanon
Chile
Costa Rica
Brazil Mexico
Peru
Venezuela
Philippines
TunisiaHungary Argentina
Sri Lanka
Colombia
Czech Rep
KenyaZimbabweBulgaria Turkey
Uruguay
Croatia
Cote D'Ivoire
Slovenia
SyriaLithuania
Pakistan
Poland
Paraguay Romania
VietnamChinaAlgeria Iran
Cameroon
Belarus
India Ukraine
Nigeria
Bangladesh
Israel
1000
100
10
0
5000
10000
15000
20000
GNP per capita ($ PPP)
25000
30000
35000
Cross Elasticity
Suppose that when the price of a burger falls by 10
percent, the quantity of pizza demanded decreases by 5
percent.
Cross
elasticity of
demand
=
– 5 percent
– 10 percent
=
0.5
Cross Elasticity of Substitutes vs. Complements
Cross elasticity of demand
for a substitute is >0
•  Fall in the price of Pepsi: decrease in consumption of
Coke
•  Qd of coke and P of its substitute change in the same
direction.
•  Make sure you know why for complements the QD and
P change in opposite directions.
 What determines fairness?
 Equal opportunity
 Equal outcomes
Inequality and efficiency
 Main concern of neoclassical theory is
efficiency
 Efficiency defined by marginal cost and
marginal benefit
 What about inequality?
Inequality
Inequality
 Income share by income group
Inequality in opportunity as
well as outcomes
Efficiency: Marginal benefits (MB)
MB: what people are willing to forgo to get one more
unit of the good.
MB decreases as the quantity of the good increases—
the principle of decreasing marginal benefit
Marginal Cost (MC)
MC increases as more of the good is produced.
MC curve shows the amount of other goods and
services that we must give up to produce one more
pizza.
Another look at the demand curve
A demand curve (D) is a marginal benefit curve.
D shows the value the consumer places on each pizza.
This is equal to MB.
MB and consumer surplus
Consumer surplus is the MB from a good or service
minus the price paid for it, summed over the quantity
consumed.
Consumer Surplus (CS) and total benefit
CS from the 10,000 pizzas =
MB – P for all the pizzas.
CS = $
The total benefit is
expenditure on pizza +
consumer surplus =
$
From the Production (Supply) Side of the Market
 Supply and Marginal Cost
Sellers distinguish between cost and price.
•  Cost is what a seller must give up to produce the
good.
•  Price is what a seller receives when the good is
sold.
The cost of producing one more unit of a good or
service is its marginal cost (MC).
Cost, Price and Producer Surplus
A supply curve (S) is a MC curve.
S tells us the dollars worth of other goods and services
that firms must forgo to produce one more pizza.
That is, the S shows the seller’s cost of producing
each unit of pizza.
Producer Surplus
Producer surplus is the price of a good minus the
opportunity cost of producing it, summed over the
quantity produced.
Cost, Price and Producer Surplus (PS)
PS = P - MC
P = $10
PS is the triangle equivalent to
CS (upside down)