Post on 14-Apr-2017
transcript
PSCI 1500: Introduction to
Economics
Social Cost & Social Benefits
BENEFITS & COSTS: THE INDIVIDUAL
Defining Benefits & Costs
• Cost-Benefit Analysis - Weighing the costs and benefits of an action in order to maximize the net benefit from the action.
• Utility - Satisfaction realized from the consumption of a good or service.
• Opportunity Cost - Cost of acquiring a good or service measured in terms of the value of the opportunity or alternative foregone.Everything one does has an opportunity foregone
BENEFITS & COSTS: THE INDIVIDUAL
Measuring Benefits & Costs
Marginal Benefit (MB)• Also called marginal utility.• Change in total satisfaction from
consuming an additional unit of a good, service, or activity.
Total Benefit (TB)• Also called total utility.• Total amount of satisfaction received from
consuming a specified number of units of a good, service, or activity.
BENEFITS & COSTS: THE INDIVIDUAL
Law of Diminishing Marginal Utility
• As additional units of an item are consumed, beyond some point each successive unit of the item consumed will add less to total utility than was added by the unit consumed just before it.
BENEFITS & COSTS: THE INDIVIDUAL
Measuring Benefits & Costs
Utility Points from Attending a Concert
BENEFITS & COSTS: THE INDIVIDUAL
Measuring Benefits & Costs
Marginal Cost (MC)Change in total cost from each additional unit of a good, service, or activity produced.
Total Cost (TC)Cost of producing a specified number of units of a good, service, or activity.
BENEFITS & COSTS: THE INDIVIDUAL
Measuring Benefits & Costs
Total and Marginal Costs of Attending a Concert
BENEFITS & COSTS: THE INDIVIDUAL
Maximizing Satisfaction
• Net Benefit• Results when total cost is subtracted from total benefit. (Net Benefit = TB – TC)
• Maximizing Satisfaction Using The Net Benefit Maximizing Rules• Net benefit is maximized where total benefit exceeds total cost by the greatest amount, or where marginal benefit equals marginal cost.
BENEFITS & COSTS: THE INDIVIDUAL
Conditions under Net Benefit Maximization Rule
• Net benefit increases as long as marginal benefit is greater than marginal cost (MB>MC), no matter how small the difference.
• Net benefit decreases when marginal cost becomes greater than marginal benefit (MC>MB) because more is subtracted than is added to satisfaction.
BENEFITS & COSTS: THE INDIVIDUAL
Maximizing Satisfaction
Benefits and Costs of Attending a Concert
BENEFITS & COSTS: THE BUSINESS
Measuring Revenues and CostsTotal Revenue (TR)
• Revenue received from selling a certain quantity of an item.• Calculated by multiplying the price of an item
by the quantity demanded at that price.
Marginal Revenue (MR)• Change in total revenue when one more unit of an item is demanded.
BENEFITS & COSTS: THE BUSINESS
Measuring Revenues and Costs
Example : Revenues from Selling Chairs
BENEFITS & COSTS: THE BUSINESS
Measuring Revenues and Costs
Example : Costs of Producing Chairs
BENEFITS & COSTS: THE BUSINESS
Maximizing Profit
• Profit or LossResult when a business subtracts its total cost from its total revenue.
Profit Maximizing RulesProfit is maximized at the output level where total revenue exceeds total cost by the greatest amount, or where marginal revenue equals marginal cost.
BENEFITS & COSTS: THE BUSINESS
Maximizing Profit
Revenues, Costs, and Profit on Chairs
SOCIAL BENEFITS & COSTS
Social Benefits & Costs Externality
Effect of an action on a person or thing that was not one of the primary parties to the action.
Positive ExternalityExternality that creates a benefit for others.
Negative ExternalityExternality that creates a cost for others.
SOCIAL BENEFITS & COSTS
Maximizing Society’s Net Benefit
• Social Benefits & Costs• Total effect of society from the private benefits, private costs, and externalities of an action.
• Private benefits + positive externalities = social benefits
• Private costs + negative externalities = social costs• Social benefits – social costs = net benefit to society
SOCIAL BENEFITS & COSTS
Maximizing Society’s Net Benefit
Relationship between private and social net benefits
When production generates negative externalities, society’s net benefit is maximized by cutting back on the output level, and vice versa.
SOCIAL BENEFITS & COSTS
Government Policies to Maximize Society’s Net Benefit
• Fines, increase in tax• Outright prohibition from producing, • any relevant campaign or penalties to
provide the economy with positive externality or reduce the negative externality.
TEST YOUR UNDERSTANDING
What is referred as negative externality? Positive externality? Give example.
Negative externality is the costly effects of an action on a person or thing that was not one of the primary parties to the action. Example : non-halal products to Muslims, drugs, cigarettes, pollution etc.
Positive externality is the beneficial effects of an action on a person or thing that was not one of the primary parties to the action. Example – education, safety measure, healthy lifestyle etc.
How does the government policy respond to the case of externalities?
Government policies main objective is to maximize society’s net benefit.
fines, increase in tax, outright prohibition/ban or restrict production, campaign or penalties to reduce the negative externality.
subsidize or give incentive for the production generating positive externality.
TEST YOUR UNDERSTANDING