Principles of Microeconomics / Unit 17 MIC 1631 review, 2 to 3 minutes
One Rule, Seven Decisions
The idea
Every decision in this course is the same decision. The rule is: do one more unit while its marginal benefit is at least its marginal cost, and stop at the unit where they meet. What changes is only what counts as benefit and cost. The consumer's benefit is marginal utility and the cost is price, so the rule becomes equal marginal utility per dollar across goods. The competitive firm's benefit is price, its marginal revenue, and the cost is marginal cost, so it produces to price equals marginal cost; the monopolist's benefit is marginal revenue below price, and the same rule gives less output. The employer's benefit from a worker is marginal revenue product and the cost is marginal factor cost, the wage under competition, more under monopsony, so it hires to their equality. The investor's benefit is the present value of a machine's returns and the cost is its price, so it buys while net present value is positive. The polluter's benefit from another ton is the abatement cost saved and the cost is the damage, so the efficient level of pollution is where they meet, not zero. The public good's benefit is the sum of every user's benefit from the same unit, and the cost is its marginal cost, so the efficient quantity is where that sum meets the cost. And the market as a whole is efficient where demand, marginal benefit to buyers, meets supply, marginal cost to sellers, which is the rule applied to everyone at once; every failure in the course is a wedge that stops the market short of that point or pushes it past.
In practice
Worked example, the car wash's fourth worker three ways. As a hiring decision: the fourth worker adds eighteen cars at ten dollars, one hundred eighty, and costs one hundred fifty; hire. As an output decision: those eighteen cars cost one hundred fifty, eight dollars thirty-three each, against a ten-dollar price; produce them. As the market's decision: each of those cars is worth ten to a buyer and costs eight thirty-three to make, so making them adds to social surplus. The fifth worker adds fourteen cars for one hundred fifty, ten seventy-one each, above the price: not hired, not produced, and not worth making.
Where people slip
Three cautions. The rule uses marginals, and every common error in this course is an average where a marginal belongs: average cost for marginal cost, average product for marginal product, a bundle's average for the last unit's marginal utility. The rule finds the best point given the curves; it does not say the curves are right, which is why an externality needs the social curves before the rule gives the social answer. And sunk costs are on neither side of the rule; what has been spent cannot be marginal.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Builds on
Unlocks
- Nothing yet depends on this.
Something wrong in this lesson? Flag it