Economics Pioject

T y p e t h e c o m p a n y n a m e ]
T y p e t h e c o m p a n y a d d r e s s ]
T y p e t h e p h o n e n u m b e r ]
T y p e t h e f a x n u m b e r ]
P i c k t h e d a t e ]
class
This is a short document.

Contents
. eIinitions ................................................................................................................................................... 2
2. Criticisms oI the Market Economy ............................................................................................................... 2
. Public Goods ................................................................................................................................................. 2
4. Externalities................................................................................................................................................. 2
5. Economies oI Scale ...................................................................................................................................... 2
6. Income istribution ..................................................................................................................................... 2
7. emand ....................................................................................................................................................... 2
8. Price Elasticity oI emand ........................................................................................................................... 4
. Supply ......................................................................................................................................................... 4
. Labor Productivity ................................................................................................................................... 54
. Factor Returns & Scale Returns ............................................................................................................... 65
2. Price Elasticity oI Supply ......................................................................................................................... 65
. Market Supply & emand ....................................................................................................................... 65
4. The Operation oI Markets .......................................................................................................................... 6
5. Producer and Consumer Surplus .............................................................................................................. 76
6. Changes in Market Equilibrium ............................................................................................................... 76
7. Market Intervention ................................................................................................................................. 76
8. Price Ceilings ............................................................................................................................................ 7
. Price Floors ............................................................................................................................................. 87
2. Taxes and Subsidies ................................................................................................................................. 87
2. Market ynamics ...................................................................................................................................... 8
22. Cyclical Patterns in Markets..................................................................................................................... 8
2. Economic EIIiciency ............................................................................................................................... 8
24. The Marginal Equivalency Condition .........................................................................................................









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conomics

efinitions

Technical EIIiciency / Engineering EIIiciency: Goods are produced using the minimum possible resources.
Economic EIIiciency: A condition where the ratio MU/MC is equal Ior all goods and services.
Traditional Economy: Resource allocation determined by social custom and habits established over time.
Command Economy: Resource allocation determined by central planning.
Market Economy: Resource allocation determined by a competitive market.
Opportunity Cost: The best alternative Ioregone in order to produce a good or service. (Anderson, 2
Public Good: A good or service that, once purchased by anyone, can oI necessity be enjoyed by many.
Externality: A cost oI goods or services that is borne by someone other than the recipient oI those goods or services.
Lorenz Curve: Graphs the percentage oI households against the percentage oI income received.
Ceteris Paribus (cet. par.: When analyzing one variable, the convention that all other variables are held constant.
InIerior Good: An inIerior good is one Ior which the quantity purchased decreases when real income increases.
GiIIen Good: A good Ior which there is a range oI prices Ior which quantity and price vary directly, not inversely.
ependent Variable: A variable whose value is determined by the model.
Independent Variable: A variable whose value is Iixed external to the model. (sweeney, 2
Complementary Good: A good whose demand curve shiIts along with that oI another good.
Substitute Good: A good whose demand curve shiIts inversely with that oI another good.
Normal ProIit: The amount oI proIit just suIIicient to keep resources in the industry. Included as part oI cost.
Coase`s Theorem: The exchange solution to external costs.
Ricardo`s Theorem: A prooI that a a poor country can trade to mutual advantage with a rich one, despite having no
absolute advantage in any area.
Okun`s Law: An equation relating the unemployment rate to the gap between actual and potential output.
Phillips Curve: Graphs unemployment against inIlation across a range oI possible aggregate demand.
Exogenous: A variable whose value is determined external to a given model.
Endogenous: A variable whose value is determined internally within a given model.

Criticisms of tbe Market Economy

Wrong goods and services: Too many porn Iilms and alcohol, too Iew hospitals and churches.
The Iallacy oI consumer sovereignty: Consumers buy what advertisers convince them they want.
The pollution problem: Free market economies are the world`s worst polluters.
Poverty amongst plenty: Highly aIIluent market economies still contain widespread severe poverty.
InIlation and unemployment: II unemployment and inIlation are a tradeoII, why did we experience 'stagIlation in
the late 7s and early 8s?

aTic Coods

The problem with public goods is that they can lead to ineIIicient allocation oI resources. II there are Iour houses in
a neighborhood with a crime problem, each household, acting independently, may conclude that it is worth paying
Ior a security patrol. But then we have Iour security patrols, three oI which are unnecessary and economically
ineIIicient. Conversely, each may wait Ior a neighbor to pay Ior the patrols, and too Iew resources are employed.
This problem cannot be solved through the market. Collective action is necessary.

Externaities

An externality exists when there is a mismatch between who pays Ior a good or service or consumes a resource, and
who beneIits Irom same. Example: A Iactory pollutes a river, reducing the real incomes oI Iishermen. The Iactory
enjoys the Iull economic beneIit Irom the resource oI a clean river. This is another problem that cannot be solved
through the market and must be solved through collective action. Note that iI the Iactory buys the Iishing rights to
the river, there is no longer any problem.

Economies of Scae

II substantial economies oI scale exist, then much less oI society`s scarce resources will be used to produce a given
level oI output by a single Iirm than my two or more Iirms. However, iI a single Iirm produces all oI the good, it will
have monopoly power and will sell the good at a price above that which a competitive situation would have
produced. This problem cannot be solved through the market and must be solved through collective action to
regulate the monopoly.

ncome istriTation

Pure market Iorces may produce a distribution oI income that is considered unjust or undesirable. Market Iorces will
not correct this situation. Collective action is necessary iI the distribution oI income desired is not similar to the
distribution oI income observed in a pure market. The 'right distribution oI income is a value judgement and not
subject to economic analysis.

emand

Households have a limited income and potentially unlimited wants. The household cannot satisIy all its wants with
the scarce resources (income available. ThereIore the household must decide which bundle oI goods and services
will come closest to satisIying all its wants, given the income available. The assumption oI consumer rationality
supposes that consumers know what their best interests are, know all the possible options Ior spending their income,
and choose the best available in each time period. Consumers are thereIore 'utility maximizers.

Marginal utility diminishes as quantity increases. II you have no Iood, the Iirst dollar spent on Iood saves you Irom
starvation and is thereIore oI extremely high marginal value. The next dollar saves you Irom severe hunger, but you
are no longer in danger oI actual starvation. ThereIore the utility gained by spending the second dollar is less than
that gained by spending the Iirst. Eventually, the marginal utility oI Iood diminishes until it is lower than the
marginal utility oI some other good or service, at which point the household stops buying Iood and starts buying
something else. A rational utility maximizer will be in equilibrium when the marginal utility oI the last dollar spent
on every good is equal. I.E. MU(A/Price(A MU(B/Price(B MU(C/Price(C etc.

emand Curve: A graph which shows the quantity oI a good that will be purchased Ior any given price, cet. par.
Price is on the Y axis and quantity is on the X axis. Generally this curve is negatively sloped. A change in price and
quantity is a 24;e2ent al4ng a demand curve. A change that impacts the quantity to be purchased at a given price,
such as a new competitive product being introduced, is a shift in a demand curve.

The Income EIIect: Given a change in household real income, the demand curve Ior a given good will shiIt.
However, this shiIt may be in either direction. For inIerior goods, such as cheap cuts oI meat, the quantity purchased
will decline as income increases. For normal goods, the quantity will increase. The Substitution EIIect: Given a
change in the price oI a good, cheaper goods will be substituted. The substitution eIIect is always negative.
For most goods, both normal and inIerior, the demand curve is negatively sloped since the substitution eIIect
generally outweights the income eIIect. But there are some cases where the income eIIect outweights the
substitution eIIect and a non-normal demand curve can be observed. These cases are known as GiIIen goods.
Example: Nineteenth century Irish households are said to have spent almost all their income on potatoes. However,
when there was a good potato crop, the price oI potatoes Iell dramatically. Households could then buy the same
amount oI potatoes Ior much less oI their income. However, since the remaining income could be spent on other
IoodstuIIs, the quantity oI potatoes purchased Iell. ThereIore the quantity oI potatoes purchased varied directly
(rather than inversely with price, at least over a certain price range.

The market demand curve Ior a good is the sum oI all individual demand curves Ior that good.

% rice Easticity of emand

emand is said to be price inelastic when, as price changes, the proportional change in the quantity demanded is less
than the proportional change in price, i.e. Q/Q ~ P/P. emand is price elastic when P/P ~ Q/Q. When demand
is price inelastic, the total expenditure increases as price increases. When demand is price elastic, the total
expenditure decreases as price increases. Price elasticity is diIIerent at diIIerent points along a linear demand curve.
For unitary price elasticity, the proportional change is equal and total expenditure is the same at all prices. PerIect
elasticity is a horizontal demand curve and means that all output can be sold at a given price, but none can be sold
above that price (and presumably none will be oIIered below it. PerIect inelasticity is a vertical demand curve and
means that the same quantity is purchased regardless oI the price.

% Sa\\y

A supply curve graphs the quantity produced (X axis against the selling price (Y axis. The market supply curve is
the sum oI the supply curves oI all Iirms participating in the market.

The production Irontier graphs the output that can be produced against the variable Iactor input (perhaps labor. The
production Irontier shows how much can be produced iI the Iirm operates in an engineering eIIicient manner.
Obviously, it would be possible to produce less than the Irontier. Production Irontiers are generally S-shaped; there
is rapid increase Irom zero to some point, but then the increase tapers oII as variable Iactor input goes to high values.
The production Irontier curve can shiIt iI Iixed Iactors are changed; i.e. a bigger Iactory is bought.

Marginal product is the additional output produced by the last unit oI variable Iactor input (Ior example, the last
person hired. Average product is the quantity oI total output divided by the quantity oI variable Iactor input. Total
product is synonymous with the quantity oI total output. When MP ~ AP, AP is increasing. When MP AP, AP is
decreasing. When AP is at maximum, APMP.

The rule Ior a proIit maximizing Iirm is to continue to produce until MP MC (marginal cost.

The 'short run is the time period over which variable Iactors oI production can be altered, but Iixed Iactors cannot.
The 'long run is the time period over which all Iactors can be altered, including Iixed costs.

The total cost curve, which is the sum oI the Iixed and variable cost curves, takes its shape Irom the productivity
curve. Marginal cost is the change in total cost associated with producing one more unit oI output.

Total Cost: TCFCVC
Average Total Cost: ATCTC/Q
Average Variable Cost: AVCVC/Q
Average Fixed Cost: AFCFC/Q
ATCAFCAVC

When ATC is minimum, ATCMC.
When AVC is minimum, AVCMC.
When MC ~ ATC (AVC, ATC (AVC is increasing.
When MC ATC (AVC, ATC (AVC is decreasing.

A short run supply curve shows the quantity that a Iirm would be willing to produce at any given price. For a price
taker, ARMRPrice. Since a proIit maximizing Iirm wishes to produce up to the point where MRMC, the Iirm`s
supply curve will be the same as the Iirm`s marginal cost curve. Operating at PARMRMC does not necessarily
mean the Iirm is breaking even, only that it is maximizing proIit / minimizing loss. A Iirm breaks even when
AR~ATC. Since Ior a price taker ARMRMC, this is also when MC~ATC. Assuming that a Iirm is not willing to
stay in business unless it at least breaks even, the supply curve only includes that portion oI the marginal cost curve
where MC~ATC. Also, in the short run, there is some maximum quantity oI output that Iixed Iactors can possibly
support. Above this quantity, no Iurther output is Iorthcoming no matter what the price. So the short run supply
curve eventually becomes a vertical line. Given that the short run is deIined as the period during which Iixed costs
do not change, the only Iactor which can cause a Iorm`s short run supply curve to shiIt is the cost oI the variable
Iactor oI production.

In the long run, the proIit maximization rule is the same: MRLRMC. LRMC diIIers Irom MC
SR
in that there are no
Iixed costs. The LRAC curve shows the average cost to produce each level oI output, assuming that all Iixed Iactors
oI production have been designed and planned Ior that particular level oI output. Short run equilibrium occurs when
MC
SR
MR. Long run equilibrium occurs when LRMCMR. Full equilibrium occurs when LRMCMC
SR
MR. II a
Iirm is in short but not long run equilibrium, it will have no immediate incentive to change the level oI output, but
will tend over time to want to change its Iixed Iactors.

The market supply curve in the long run is no longer simply the sum oI all the participating Iirms, because in the
long run, Iirms can enter or leave the markethence there are no 'existing Iirms. Assuming no substantial
economies oI scale exist, there are two possible long-term market supply curves. First, iI new Iirms entering the
market does not cause Iactor prices to change, then the market supply curve will be a horizontal line. This represents
the price at which a Iirm earns a normal proIit. At any higher price, Iirms will earn higher than normal proIit and
thereIore new Iirms will enter the industry. At any lower price, Iirms will earn less than a normal proIit and will
leave the industry. ThereIore, the long run market supply curve will equal the point oI minimum average total cost
which will be equal Ior all participating Iirms.

It is probably not realistic to suppose that Iactor prices will remain Iixed as Iirms enter the industry. As more Iirms
enter, there will be more demand Ior Iactors oI production, so prices will rise. The long run supply curve will be
positively inclined to the price axis. For increasing quantity to be produced, higher prices will have to be paid to
attract more Iirms into the industry in the Iace oI increasing Iactor prices.

aTor rodactivity

Labor productivity equals the amount oI output produced per unit oI labor (ie, man-hour or man-month. II labor
productivity diIIers between two plants oI equal capital input, Iirms are likely to Iavor the conditions (such as
location oI the more productive plant. However, these decisions can cause considerable controversy.

In competitive labor markets, the wage rate is equated to the marginal product oI labor. iIIerent workers have
diIIerent marginal products, depending on their capability oI contributing to output (ie, their skills. However, some
people have zero or near-zero marginal products. These people will not have jobs. Economics bails out on answering
questions like 'is this right or 'is this Iair because these problmens cannot be analyzed economically.

actor Retarns & Scae Retarns

Return to variable Iactor input is the relationship between changes in a particular variable Iactor input and total
output, with all other Iactors held constant. Increasing returns occur where Q/Q ~ L/L where L is the variable
Iactor input. In other words, a change in variable Iactor input returns a greater than proportional change in total
output. iminishing returns occur where Q/Q L/L and constant returns where Q/Q L/L. Return to Iactor
input is a short term relationship because in the long run the 'other Iactors (like Iixed costs cannot be held
constant.

Return to scale is the relationship between changes in all Iactors put together and total output. Increasing returns to
scale occur where Q/Q ~ L,C/(L,C, where (L,C is the total variable and Iixed Iactors oI production. Because
all Iactors are lumped together as iI they were variable costs, this is a long term relationship.

Factor and scale returns can be classiIied as increasing, diminishing or constant only over a particular range. Over
the entire range oI possible outputs, all three types oI returns will most likely be evident. There is no relationship
between Iactor and scale returns.

rice Easticity of Sa\\y

Similar to demand elasticity. Some goods are completely supply inelastic. There is only one Mona Lisa and there are
only a Iixed number oI World Series tickets. With the exception oI these goods, long run supply tends to be more
elastic than short run supply. II one Iactory can produce one million units, then short run supply is inelastic Ior
quantities above one million. However, in the long run, another Iactory can be built.

Market Sa\\y & emand

For exchange to take place, a market supply curve and a market demand curve must exist and there must be at least
one common price at which suppliers are willing to sell some quantity oI the good and at which buyers are willing to
buy some quantity oI the good.

II at all positive prices in a market the quantity oI a good supplied exceeds the quantity supplied, the price oI the
good will be zero ('Iree good. Fresh air is an example. A certain amount oI Iresh air exists at a price oI zero. For
more than this quantity to be produced, the price has to be greater than zero. However, there is a certain maximum
demand that exists even at a price oI zero: II everyone has as much Iresh air as they need, they do not want any more
even iI there is no cost. II the quantity oI Iresh air that can be supplied at a price oI zero exceeds the maximum
amount demanded, then Iresh air is a Iree good. II the supply curve shiIts to the leIt due to air pollution, Iresh air
may cease to be a Iree good.

Excess supply exists when, at a given price, the quantity oI a good Iirms are prepared to supply exceeds the quantity
consumers are prepared to buy. Excess demand exists when the quantity consumers are prepared to buy exceeds the
quantity Iirms are prepared to supply. The price where the quantity Iirms are prepaded supply equals the quantity
consumers are prepared to buy, or in other words the price at which neither excess supply nor excess demand exists,
is called the equilibrium price. At the equilibrium price, every supplier willing to sell at that price is able to and
every consumer willint to buy at that price is able to.

be U\eration of Markets

II a price causes excess demand or excess supply in a market, Iorces in the market will change the price oI the good
and the quantity bought and sold. These Iorces will eventually eliminate any excess demand or excess supply.

II excess supply exists in a market, suppliers desire to sell more than they are able to at the prevailing price. It is to
their advantage to oIIer to sell more goods at a lower price. ThereIore competition among suppliers will Iorce down
the price oI the good. These price reductions will also decrease the quantity oI goods sold, reducing and eventually
eliminating the excess supply.

II excess demand exists in a market, buyers desire to purchase more than suppliers are willing to provide at the
prevailing price. Buyers will thereIore oIIer to pay a higher price to induce suppliers to produce more oI the good.
The increased price will result in less and eventually zero excess demand.

rodacer and Consamer Sar\as

In a market at equilibrium, all consumers who wish to purchase at the prevailing price are able to do so and all
suppliers who wish to sell at the prevailing price are also able to do so. However, most oI the consumers and
suppliers would have been willing to trade at less Iavorable prices. For a consumer who purchases a good at the
equilibrium price oI $4 but would have been willing to pay up to $7, a consumer surplus oI $ exists. For a
supplier who sells a good at $4 but would have been willing to sell at $2, a producer surplus oI $2 exists. The
market consumer and producer surpluses are the sum oI all individual surpluses and are graphically represented by
the area measured between the supply or demand curve, a horizontal line at the equilibrium price, and the price axis
(ie a vertical line at zero quantity. These surpluses provide the motivation Ior the market to achieve equlibrium.

Cbanges in Market EqaiiTriam

II a market is in equilibrium and any oI the conditions determining demand or supply change, then market Iorces
will establish a diIIerent equilibrium price and/or equilibrium quantity. This would be reIlected by a shiIt in the
supply or demand curve and a resulting change in the point at which the two curves intersect.

II supply rises and demand rises, then the equilibrium quantity will rise but the equlilibrium price is indeterminate.
.

Market ntervention

Intervention (or regulation occurs when a non-market Iorce causes the price and quantity oI a good bought and sold
in a competitive market to be diIIerent Irom the price/quantity combination that would occur iI the market were
allowed to operate Ireely. Tickets to the World Series are sold Ior a price much lower than would prevail iI market
Iorces were allowed to set prices. Minimum wage laws Iorce labor prices to be higher Ior certain jobs than they
would be in a Iree market.

% rice Ceiings

When the price oI a good is Iixed below the equilibrium level, a price ceiling is said to exist in the market Ior the
good. Price alone will be an inadequate mechanism Ior allocating the available supply oI the good among potential
buyers, and some other allocative mechanism such as Iirst come-Iirst served, reliance on supplier`s preIerences, or
rationing, may be employed.

Black markets (perhaps illegal can exist in the presence oI price ceilings. II one individual is prepared to pay the set
price but no more (i.e. would preIer any amount oI cash over the set price to the good, and another individual is
willing to pay more than the set price, the two can engage in mutually beneIicial trade.

% rice oors

When the price oI a good is Iixed above the equilibrium level, a price Iloor is said to exist in the market Ior the
good. At the Iixed price, there would be an excess supply oI the good and some method other than price would have
to be Iound Ior disposing oI the excess. For example, the prices oI many agricultural goods are subject to price
Iloors. The surplus exists because producers are prepared to produce more at the Iixed price than consumers are
prepared to buy. The regulating agency has to determine how to deal with this problem.

O The surplus can be produced and destroyed, which would be an obviously ineIIicient use oI society`s scarce
resources but might be justiIiable, say in the case where prices below the Iloor would cause Iarmers to go
bankrupt and this would in turn cause socially unacceptable levels oI Iood scarcity.
O The regulating agency could also stockpile the surplus and release it to the market in the event oI poor
production (crop Iailure or whatever in the Iuture; this would tend to even out price Iluctuations over time.
O Another option is to sell the surplus abroad.
O Yet another option is to pay producers not to produce. This is no more wasteIul oI resources than producing and
destroying the surplus, and may be less wasteIul iI there are costs associated with destroying the goods.

The minimum wage is another example oI a price Iloor. The eIIect oI a minimum wage is to create excess supply oI
labor. Those who keep their jobs are better oII at the expense oI those who lose their job. Again the regulating
agency is presented with the problem oI what to do with this excess supply.

axes and SaTsidies

Taxes and subsidies have an eIIect on market supply and demand curves. II a tax is paid per output by suppliers,
then the supply curve will shiIt upwards by an amount equal to the tax per unit. Given an upward sloping demand
curve, this will result in an increase in price and a decrease in output. The burden oI the tax will be allocated
between consumers and producers depending on the price elasticity oI the demand curve. II the demand curve is
relatively inelastic, the price paid by consumers will rise by a relatively large amount and the quantity produced will
not Iall much. Consumers will bear a relatively high proportion oI the total tax, as represented by the increased price
per unit. II the demand curve is relatively elastic, the price paid by consumers will not rise much but the quantity
produced will drop substantially. Since producer revenue is the price paid by consumers less the tax per unit sold,
producer revenue will Iall by a relatively high amount (the loss oI revenue due to the tax will not be oIIset very
much by the small price increase and producers will bear a high proportion oI the total tax.

Market ynamics

Equlibrium prices are the targets that market Iorces will drive towards, in the absence oI any changes external to the
market (ie, any shiIts oI demand or supply curvesas opposed to movements along demand or supply curves.
However, calculating the equilibrium price does not tell you how long it will take to achieve or by what sort oI
process it will be achieved. Supply curves (and thereIore equilibrium prices also diIIer depending on the time
period being considered. II (Ior whatever reason demand Ior salmon rises sharply in the middle oI a trading day, it
will be impossible to bring more salmon to market that day, and so Ior the rest oI the trading day the supply curve oI
salmon will be completely inelasticthere are a Iixed quantity oI salmon to be sold no matter what the price. (This
is the 'market period, which is shorter than the short runsupply is generally inelastic during the market period
because neither variable nor Iixed Iactors can be changed. Because supply is inelastic, shiIts in the demand curve
will result in relatively large changes in price.

In the short run, variable Iactors oI production can be changed in response to shiIts in the demand curve. So in the
short run, equilibrium price does not change as much as it does during the market period, because equilibrium
quantity can also change. Quantity is still bounded by the number oI Iirms in the market and their existing Iixed
Iactors, none oI which can change in the short run.

In the long run, all Iactors can be changed. Quantity is not bounded by any Iactors oI production because all Iactors
are variable. So in the long run, equilibrium quantity can change more than in the short run, and equilibrium price
will change less. II the long run supply curve is completely elastic (ie horizontal, which happens when Iactor costs
are not aIIected by new Iirms entering the market, the price will always return to the same equilibrium level in the
long run.

Cycica atterns in Markets

Producers determine production quantities in response to market conditions, but there is oIten a lag between when
production decisions get made and when output is ready Ior sale. As a result, cyclical patterns can appear where
markets oscillate around an equilibrium point. The 'cobweb model analyzes this pattern by dividing market activity
into discrete periods and assuming that the quantity produced in each period is the quantity that would have been
proIit-maximizing in the previous period. The process goes like this:

- Suppliers bring some quantity Q to market.
- Based on the demand curve, consumers are willing to pay a price P Ior this quantity.
- Suppliers relate price P to their supply curve, and determine the quantity Q2 they will bring to the next market.
- Repeat.

This model assumes that producers always believe that the current market price will remain in eIIect, and are always
surprised when it doesn`t. In the real world, producers would be more sophisticated in their analysis. In the real
world, there may also be speculators, who buy quantities oI the good at low prices and then re-sell at high prices,
which will aIIect the stability oI the market.

Price and quantity are expected to move towards the equilibrium level. However, they can also diverge Irom
equilibrium. This occurs when the supply curve is steeper than the demand curve. For each adjustment that suppliers
make, purchasers make a much larger adjustment, throwing the next period Iurther and Iurther Irom equilibrium.

Economic Efficiency

The principle oI diminishing marginal utility is that generally the 'next unit oI a commodity is oI less beneIit than
the 'previous unit. Individuals can trade to mutual beneIit, increasing the utility oI both individuals. II one person
has nothing but Iish and another has nothing but loaves, the Iirst loaI has migher marginal utility to the Iish producer
than the last Iish; conversely, to the loaI producer, the Iirst Iish has higher marginal utility than the last loaI. Trading
one Iish Ior one loaI increases both individual`s total utility. Economic eIIiciency exists when the total utility oI
society is maximized Ior the available resources. (sweeney, 2

be Margina Eqaivaency Condition

A consumer will maximize utility when the last dollar spent on every good or service yields an equal beneIit. This is
true when the marginal utility oI the last units purchased, divided by the price, is equal: MU
A
/P
A
MU
B
/P
B

MU
C
/P
C
MU

/P

etc. In perIect competition, pricemarginal cost. So in an economically eIIicient, perIectly

competitive market, MU
A
/MC
A
MU
B
/MC
B
MU
C
/MC
C
MU

/MC

etc. This is an equilibrium situation and

any other allocation oI resources will tend to move towards this equilibrium as proIit maximizing producers and
utility maximizing consumers attempt to improve their lot.
ibliogiaphy
Anderson. (2. anage2ent science. mumbai: sweeney publishers.
sweeney. (2, october 5. ec4n42ics re;isited. Retrieved april 4, 2, Irom economics revisited:
www.sciencedirect.com


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