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ECON101: Principles of Microeconomics

Unit 3: Markets and Individual Maximizing Behavior   This unit will examine the ways in which markets increase overall welfare through the concepts of consumer and producer surplus.  We will discuss the concepts of marginal costs and benefits and take a look at how they affect a firm’s decision on whether or not to make one more or one less product.

We have already learned that, at its most fundamental level, microeconomics is the study of how we make decisions.  To expand on this point, we need to distinguish between the “either/or” decision and the “how much” decision.  You will find this concept useful when looking more closely at why firms produce certain levels of output, taking into consideration opportunity cost and sunk (fixed) cost.

Unit 3 Time Advisory
This unit should take approximately 5.25 hours to complete.

☐    Subunit 3.1: 2 hours

☐    Subunit 3.2: 2 hours

☐    Assessments: 1.25 hours

Unit3 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Identify the maximizing behavior of individuals in the market. - Identify the behavior of individuals when markets fail.

3.1 Maximizing in the Market Place   - Reading: Principles of Microeconomics: “Chapter 6, Sections 1 and 2” Link: Principles of Microeconomics: “Chapter 6, Sections 1 and 2” (PDF)

 Instructions: Read section 1 to revisit the concept of Marginal
Costs and Benefits within the context of the consumer’s (and the
firm’s) maximizing behavior.  Proceed to section 2, which defines
two new concepts: “Consumer Surplus” and “Producer Surplus.”  Please
take a moment to read through the stated learning outcomes for this
chapter of the text, which you can find at the beginning of each
section.  These should be your goals as you read through the
chapter.  

 Reading these sections should take approximately 1 hour and 30
minutes.  

 Terms of Use: The text was adapted by The Saylor Foundation under a
[CreativeCommons-Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work's original creator or licensee.
  • Web Media: YouTube: Saylor Foundation’s “How Much to Produce? The Story of Marginal Revenue and Marginal Costs” Link: YouTube: Saylor Foundation’s “How Much to Produce? The Story of Marginal Revenue and Marginal Costs” (YouTube)

    Instructions: Watch this video about how an apple farmer decides the optimal number of apples to pick. At the end of the video, consider whether or not the government should intervene. Think about which arguments you might make both supporting and disagreeing with the government acting in the market. In 3.2, we will cover specific ways the government might participate in the market.

    Watching this video and pausing to take notes should take approximately 5 minutes.

  • Lecture: Khan Academy’s “Demand Curve as Marginal Benefit Curve” LInk: Khan Academy’s “Demand Curve as Marginal Benefit Curve” (YouTube)

    Instructions: Please watch the entire lecture, which is about the demand curve as a marginal benefit curve.

    Watching this lecture should take approximately 5 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Consumer Surplus Introduction” Link: Khan Academy’s “Consumer Surplus Introduction” (YouTube)

    Instructions: Please watch the entire lecture, which is about consumer surplus.

    Watching this lecture should take approximately 5 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Total Consumer Surplus as Area” Link: Khan Academy’s “Total Consumer Surplus as Area” (YouTube)

    Instructions: Please watch the entire lecture, which is about total consumer surplus.

    Watching this lecture should take approximately 5 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Producer Surplus” Link: Khan Academy’s “Producer Surplus” (YouTube)

    Instructions: Please watch the entire lecture, which is about producer surplus.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

3.2 When Markets Fail   Note: “Market failure” refers to a situation in which there is an inefficient allocation of goods and services in the market.  Inefficient allocation takes place when pure self-interest drives the maximizing behavior of economic agents.  Market failure is attributed to the existence of Externalities, Common Property Resources, Public Goods, and Asymmetric Information.  Market failure often leads to government intervention designed to drive the market towards efficiency.

  • Reading: State University of New York at Oswego: Professor John Kane’s Lecture Notes on ECON 101: “Chapter 14: Government and Market Failure” Link: State University of New York at Oswego: Professor John Kane’s Lecture Notes on ECON 101: “Chapter 14: Government and Market Failure” (HTML)

    Available in:
    Flash
    PPT

    Instructions: Please read Professor John Kane's Lecture Notes on Government and Market Failure (Chapter 14) for a brief overview of the topic.

    Reading this chapter should take approximately 30 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: Principles of Microeconomics: “Chapter 6, Section 4: Review and Practice” Link: Principles of Microeconomics: “Chapter 6, Section 4: Review and Practice” (PDF)

    Instructions: Read this section for a more detailed look at the topic of market failure.

    Reading this section should take approximately 30 minutes.

    Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

  • Lecture: Khan Academy’s “Rent Control and Deadweight Loss” Link: Khan Academy’s “Rent Control and Deadweight Loss” (YouTube)

    Instructions: Please watch the entire lecture, which is about rent control and deadweight loss.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Minimum Wage and Price Floors” Link: Khan Academy’s “Minimum Wage and Price Floors” (YouTube)

    Instructions: Please watch the entire lecture, which is about minimum wage and price floors.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Taxation and Dead Weight Loss” Link: Khan Academy’s “Taxation and Dead Weight Loss” (YouTube)

    Instructions: Please watch the entire lecture, which is about taxation and dead weight loss.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Percentage Tax on Hamburgers” Link: Khan Academy’s “Percentage Tax on Hamburgers” (YouTube)

    Instructions: Please watch the entire lecture, which is about a percentage tax on hamburgers.

    Watching this lecture should take approximately 5 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Taxes and Perfectly Inelastic Demand” Link: Khan Academy’s “Taxes and Perfectly Inelastic Demand” (YouTube)

    Instructions: Please watch the entire lecture, which is about taxes and perfectly inelastic demand.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Taxes and Perfectly Elastic Demand” Link: Khan Academy’s “Taxes and Perfectly Elastic Demand” (YouTube)

    Instructions: Please watch the entire lecture, which is about taxes and perfectly elastic demand.

    Watching this lecture should take approximately 5 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Negative Externalities” Link: Khan Academy’s “Negative Externalities” (YouTube)

    Instructions: Please watch the entire lecture, which is about negative externalities.

    Watching this lecture should take approximately 5 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Taxes for Factoring in Negative Externalities” Link: Khan Academy’s “Taxes for Factoring in Negative Externalities” (YouTube)

    Instructions: Please watch the entire lecture, which is about taxes for factoring in negative externalities.

    Watching this lecture should take approximately 10 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Positive Externalities” Link: Khan Academy’s “Positive Externalities” (YouTube)

    Instructions: Please watch the entire lecture, which is about positive externalities.

    Watching this lecture should take approximately 5 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Lecture: Khan Academy’s “Tragedy of the Commons” Link: Khan Academy’s “Tragedy of the Commons” (YouTube)

    Instructions: Please watch this entire lecture, which is about the tragedy of the commons.

    Watching this lecture should take approximately 5 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License 3.0.  It is attributed to the Khan Academy.

  • Assessment: biz/ed’s “Quiz on Market Failure” Link: biz/ed’s “Quiz on Market Failure (HTML)

    Instructions: Please take this quiz to assess your understanding of market failure.

    Completing this assessment should take approximately 30 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Assessment: Econ100’s “Market Failure and Public Choice Quiz: Chapter 18” Link: Econ100’s “Market Failure and Public Choice Quiz: Chapter 18” (HTML)

    Instructions: Please follow the link to get to the main page of Econ100.  Click on the “Quiz” tab on the left hand side menu and then go to Chapter 18 to take the test.  Please attempt levels 1 and 3 of the quiz for a thorough assessment of your understanding of the material covered in this unit.

    Completing this assessment should take approximately 45 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.