Marginal Cost (MC)

1
Marginal Cost (MC) The extra cost we WILL incur
when we commit an act one more time (commit the
act of buying one more unit).
Marginal Benefit (MB) The extra benefit we WILL
receive when we commit an act one more time
(commit the act of buying one more unit).
If MB greater than MC, we commit the act one more
time (commit the act of buying one more unit).
If MB less than MC, we dont commit the act one
more time (commit the act of buying one more
unit).
We will commit an act (one more time) repeatedly
as long as MB gt MC up through the point where MB
MC. Thats the last time we commit the act (or
buy one more unit).
2
Burgers Marginal Benefit
2nd 1.00
4th .50

Demand
Price Quantity
1 2
.50 4

3
Burgers Marginal Benefit
2nd 1.00
4th .50


Demand
Price Quantity
1 2
.50 4

RESERVATION PRICES!!!!!!!!!!!!!!!
4
IF MAXIMUM PRICE (mc) WE'LL PAY
FOR THE 2ND IS 1, IT MUST MEAN
THAT THE MB OF THE 2ND IS 1.


Demand
Price Quantity
1 2
.50 4

RESERVATION PRICES!!!!!!!!!!!!!!!
5
Why?
6
We buy to point where MC MB (just like we do
everything else to point where mcmb)
7
Burger MB MC
1st gt1 1
2nd 1 1
3rd gt.50 and lt1 1
4th .50 1
8
Burger MB MC
1st gt1 1
2nd 1 1
3rd gt.50 and lt1 1
4th .50 1
Demand
Price Quantity
1 2
.50 4

9
Burgers Marginal Benefit
2nd 1.00
4th .50

MB of 2nd to satisfaction we could have
gotten by spending 1 the next best way.
10
Burgers Marginal Benefit
2nd 1.00
4th .50

MB of 2nd to satisfaction we could have
gotten by spending 1 the next best way.
How much satisfaction is that?
IN REAL LIFE, We don't know!
11
Burger MB MC
1st gt1 .50
2nd 1 .50
3rd gt.50 and lt1 .50
4th .50 .50
12
Burger MB MC
1st gt1 .50
2nd 1 .50
3rd gt.50 and lt1 .50
4th .50 .50
Demand
Price Quantity
1 2
.50 4

13
Burgers Marginal Benefit
2nd 1.00
4th .50

MB of 4th to satisfaction we could have
gotten by spending .50 the next best way.
14
Burgers Marginal Benefit
2nd 1.00
4th .50

MB of 4th to satisfaction we could have
gotten by spending .50 the next best way.
How much satisfaction is that?
IN REAL LIFE, We don't know!
15
Burgers Marginal Benefit
2nd 1.00
4th .50

But we do know something for sure.
The marginal utility of 2nd is greater than
the marginal utility of 4th.
16
Burgers Marginal Benefit
2nd 1.00
4th .50

But we do know something for sure.
The marginal utility of 2nd is greater than
the marginal utility of 4th.
...because 1 spent next best way will
always buy more satisfaction (utils)
than .5 spent next best way.
17
Burgers Marginal Benefit
2nd 1.00
4th .50

And if MB of 2nd hamburger 1, and the
MB of the 1st HOTDOG .75, you prefer 2nd
burger to 1st hotdog......more utils from
2nd burger than from first hotdog,
...because 1 spent next best way will
always buy more satisfaction (utils)
than .75 spent next best way.
18
P
3
D
Q
7000
19
P
3
D
Q
7000