Microeconomics Group Project
ECON - 1031
SUBMITTED BY:
Ekam KAMBOJ (101493826)
Submitted to: | Elizebeth Issac
1. Marginal Benefit vs. Marginal Cost (Chapter 1):
Shapes:
Marginal Benefit (MB): Typically a downward-sloping curve, reflecting diminishing marginal
utility (consumers value additional units less as they have more).
Marginal Cost (MC): Usually U-shaped or L-shaped, representing increasing costs as
production scales up (due to resource limitations) or decreasing costs due to economies of
scale (efficiency gains).
Optimal Allocation: The optimal allocation point occurs where MB = MC. This is the point
where producers get the most value out of each unit produced while consumers are still willing
to pay for it.
Resource Allocation Decision: If MC > MB (current output), then production should be
decreased. Allocating fewer resources reduces costs and avoids producing units with minimal
consumer value.
2. Technological Advance and Creative Destruction (Chapter 2):
Creative Destruction: Technological advancements can disrupt existing industries and create
new ones. New technologies can make established products obsolete or less efficient, leading
to the decline of some industries while fostering the rise of others.
3. Price Ceilings and their Economic Effects (Chapter 3):
Definition: A government-imposed maximum price a seller can charge for a good or service.
Effects:
Shortages: Price ceilings set below the equilibrium price can create shortages. When the price
is artificially low, producers are less incentivized to supply the good or service, leading to a
shortage for consumers.
Black Markets: Shortages can create black markets where goods are sold illegally at higher
prices.
Lower Quality: To maintain profits with a lower selling price, producers might reduce product
quality.
Reduced Innovation: Price ceilings can discourage investment and innovation in the long run
as producers have less profit to reinvest.
4. Price Floors and their Economic Effects (Chapter 3):
Definition: A government-imposed minimum price a seller can charge for a good or service.
Effects:
Surpluses: Price floors set above the equilibrium price can create surpluses. When the price is
artificially high, producers are incentivized to supply more than consumers are willing to buy,
leading to a surplus.
Reduced Consumption: Higher prices due to price floors can discourage consumers from
purchasing the good or service.
Inefficiency: Producers might become less efficient if the guaranteed minimum price removes
the pressure to reduce costs.
5. Marginal Utility and Negative Value
Marginal utility refers to the additional satisfaction a consumer receives from consuming one
extra unit of a good or service. While it's generally positive (more units bring more satisfaction),
marginal utility can also be negative under certain circumstances.
Imagine a scenario where you're very thirsty and down your first glass of water. The satisfaction
gained (marginal utility) from that first drink is likely significant. However, as you continue to
drink, the additional benefit you receive from each subsequent glass diminishes. At some point,
you might reach a state where another glass of water is no longer satisfying, and may even
cause discomfort (fullness, bloating). In this case, the additional unit has negative marginal
utility.
Here's another example: consuming spicy food. The initial bites might be pleasant, but as you
continue eating, the spiciness might become overwhelming and unpleasant. The additional
consumption brings negative marginal utility.
Key takeaway: Marginal utility isn't always positive. As consumption increases, the additional
satisfaction can eventually turn negative. This concept helps explain consumer behavior and
why people tend to stop consuming a good or service once the marginal utility becomes
negative.
References:
Using marginal benefit and marginal cost curves to find net benefits. Open Textbooks for Hong
Kong. (2016, January 19). https://www.opentextbooks.org.hk/ditatopic/24497
Tarver, E. (n.d.). Marginal benefit vs. marginal cost: What’s the difference? Investopedia.
https://www.investopedia.com/ask/answers/051815/what-difference-between-marginal-
benefit-and-marginal-cost.asp
