Marginal Cost

The marginal cost of an activity is the sum of all the benefits forgone because of undertaking that activity. Marginal cost is the same as opportunity cost: the value of the best alternative forgone because of a

decision. Marginal costs include both explicit and implicit costs. Marginal costs exclude sunk and fixed costs.

Marginal Benefit

The benefit arising from a decision is called the marginal benefit of that decision. Marginal benefit could be purely subjective, or in monetary terms. Marginal Benefit as Avoided Cost: cost that you avoid because of making that decision.

Marginal benefit (MB) of the decision = Marginal cost (MC) of the decision

Social costs and benefits

Social costs and benefits are the costs and benefits incurred or enjoyed by the whole society. They exclude transfers among members of the society.

The marginal social cost of producing a good or service is the amount of “all the other things” that the society must sacrifice in order to produce this good or service.

The marginal social benefit of producing a good or service is the maximum amount of “all the other things” that the society is willing and able to sacrifice in order to produce this good or service.

A society will achieve maximum satisfaction if it produces goods and services up to the point where their marginal social costs just equal their marginal social benefits. MSC = MSB

Pareto Efficiency = Allocative Efficiency = Economic Efficiency => MSC = MSB = mixture of goods that society desires the most.

Necessary condition: Productive efficiency => no unemployment & no mismanaging of resources.

Consumers and Producers

Marginal willingness to pay is the most a consumer is willing and able to pay for the next unit of a good. It is the same as marginal benefit. We assume it decreases as the consumer buys more of the good.

Total willingness to pay is the amount a consumer is willing and able to pay for all the units.

The long-run supply function is a. Upward sloping in an increasing-cost industry. This is because, as the industry expands, input prices rise.b. Downward sloping in a decreasing-cost industry. This is because, as the industry expands, input prices fall.c. Horizontal in a constant-cost industry. This is because, as the industry expands, input prices do not change.

Monopoly