Unit 2 Seminar

“Holler if you hear me!”

Microeconomics

• What is this?– Small look– At what?• Value• Preferences• Costs vs. benefits

– Why?• To help individuals, businesses, etc., make choices

Value

• How do we measure the value of X?– By answering the question “How much are you

willing to pay for X?”– X can be a good or a service– Willingness to pay depends on the person• We all value things differently• Based on what?

– Our preferences– Our wealth– Our alternatives– What else?

Demand for a good

• Demand curve– Charts price of good (vertical axis) vs. the demand

for that good (horizontal axis)– Downward sloping• Meaning what?

– Normal good: one for which demand increases as income increases• Is environmental equality a normal good?

Demand (cont.)

• When it comes to environmental policy, we normally care about the aggregate demand curve: – What’s that? • The sum of all of the demand curves for the people in a

given group (i.e. the group/area you are interested in studying, for purposes of planning policy)

Benefits

• Sounds simple enough: making someone better off

• How do you do this?– Give the person something he/she values– The more one values X, the more he/she benefits

from having more X– But environmental benefits are often very hard to

measure; how do you put a price on scenic views, clean air, removal of noise pollution, etc?• So what should we do? How can we make accurate

valuations and, this, sound policy?

Costs• The opposite side of the equation from benefits• What are costs?– Obviously, the direct cost of pursuing a certain policy or

producing X (i.e. “How much will this set me back?”)– But what else?• Opportunity cost–What do I mean by this?

• Anything else?– Social costs, maybe???

Total v. Marginal Cost• Total cost: self explanatory, right?• Marginal cost: the cost to produce one more unit• Equimarginal principle: If you have multiple sources to

produce a given product or achieve a given goal, and you want to minimize the total cost of producing a given quantity of that output, distribute production in such a way as to equalize the marginal costs between the production sources.– E.g. Factory A and Factory B; Both can produce what you need; A has

outdated technology; B has new technology; A’s marginal costs increase as quantity goes up, but B’s decrease over time (See pages 59-61 of Chapter 3, for more information on this principle.)

Unit 2 To-Do List

• Readings• Discussion Board• Seminar (or alternate assignment, if you miss

Seminar)• Key Terms• Assignment• Quiz• Have a great week!