Economic objectives

What is the margin

the change in a variable causes by an increase of one unit of another variable

Example of Margin

The marginal cost of an increase is the additional cost of making one additional ice cream i.e The cost of the final increase produced

How is marginal cost calculated

difference between total cost at the new output level and total cost at one unit less than that

Example of how marginal cost is calculated

The total cost of producing 100 ice creams is $100 and the total cost of producing 101 ice creams is $102. The marginal cost of producing the 101st ice cream is $102 - $100 = $2

The concept of the margin is important in understand..

How consumers act rationally

Examples of other margins

Marginal product
Marginal Revenue
Marginal tax rate

The concept of the margin is also used for many other things like

to explain price and wage differentials and others

Traditional economic theory assumes that

Economic agents (producers, consumers, workers) want to maximise their utility

What does utility mean

“Well being” or “Satisfaction”

Different economic agents will have different ways of maximising their utility like

Consumers → maximise their happiness
Producers → Maximise their profit

Traditional economists argue in order to maximise utility, economic agents must act rationally meaning

They’ll make decisions, solely on trying to gain the maxim utility possible and nothing else will influence their decision making

Marginal utility

the benefit gained from consuming one additional unit of a good

Total utility

The overall benefit gained from consuming a good

The law of diminishing marginal utility

for each additional unit of a good that’s consumed, the marginal utility gained decreases.

An example of the law of diminishing marginal utility

Each additional biscuit eaten gives a consumer less satisfaction than the previous one

A rational consumer will choose to consume a good at the point where marginal utility

= price

An example of where marginal utility = price

If a consumer values the utility of a chocolate biscuit at 10p, they will pay 10p for it. If the utility of a second biscuit is 8p, they will pay only 8p for it.

If marginal utility decreases with each extra good consumed then the price a consumer is willing to pay for each good will

decrease

The law of diminishing marginal utility explains why

the demand curve slopes downwards

A firms profit is there

total revenue minus their total costs

Firms are traditionally assumed to want to

maximise their profit

Reasons for firms wanting to maximise profits

To survive, reward owners and staff, reinvest in the business, and expand.

However firms may want to maximise other quantities, such as total sales or firms market share because

To gain monopoly power and charge higher prices due to less competition.

Why might firms pursue ethical objectives?

To "do some good," such as supporting the local economy by buying raw materials from nearby suppliers, even if cheaper alternatives exist elsewhere, even if it doesn’t increase profits

What do consumers traditionally aim to maximize?

utility, while not spending more than their income

What does utility mean for consumers?

Utility differs for each person—it might involve security (e.g., making pension contributions) or spending on things like cars and holidays.

How are consumers assumed to act when maximizing utility?

rationally to increase their utility in the way that makes the most sense to them.

What do workers aim to maximize?

their income while balancing as much free time as they need or want.

What do governments try to balance?

Governments try to balance the country's resources with the needs and wants of the population to maximize the 'public interest.'

What are the main objectives of governments?

Economic growth, full employment, balance of payments equilibrium, and low inflation.

How is economic growth usually measured?

By growth in a country’s GDP (Gross Domestic Product).

What does full employment mean?

Everybody of working age who is capable of working has a job.

What is balance of payments equilibrium?

A balance between payments into the country and payments out over time.

Why is low inflation important?

To keep prices under control, as high inflation can cause serious problems.

Why are government objectives sometimes difficult to achieve?

They are competing objectives—achieving one may make it harder to achieve another (e.g., extra spending might create jobs but lead to higher inflation).