Markets and individual maximizing behaviour

Here we 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/ordecision 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.

We conclude with the causes and ramifications of income inequality. While there is much debate about how to address long term inequality, economists can objectively measure the problem’s scope and offer options to manage this economic phenomenon. Protracted poverty and inequality can cause long term harm to an economy’s development.

Objectives

Upon successful completion of this unit, you will be able to:

• identify the maximizing behavior of individuals in the market;
• identify the behavior of individuals when markets fail;
• apply the concept of marginal analysis in order to make optimal choices, and identify whether the choices are efficient or equitable; and
• analyze the causes and reasons for income inequality.