ECON1010 Lecture Notes - Lecture 3: Marginal Utility, Marginal Cost, Economic Equilibrium
Introductory Microeconomics:
Supply in a Perfectly Competitive Market
Lectures 3 and 4
Market: The set of all consumers and suppliers who are willing to buy and sell that good or service at
a given price
Market equilibrium: occurs when the price and quantity of a given good is stable (q consumers want
to buy = q suppliers want to sell)
Perfectly Competitive Market Identifiers:
• Free entry and exit into the market
• No externality - the buyer receives the only benefit and the supplier has the only cost.
• Homogenous goods - all the same
• Full information regarding prices and quality
• Private goods are excludable and rival
• Consumers and suppliers are price takers and rely on the market to set the price
Marginal Benefit: Extra benefit accrued from an additional unit --> a consumers marginal benefit is
the maximum amount they are willing to pay to consume that additional unit of a good or service
Marginal Cost: Additional cost from the production of another unit --> a producers marginal cost is
the minimum amount they are willing to sell that additional unit of a good or service
Cost benefit principle: An action should be taken when the marginal benefit is greater than the
marginal cost
Economic Surplus: the difference between the marginal benefit and marginal cost of taking that
action
Quantity supplied: the quantity of a good or service that maximises profit
Supply Curve: The relationship between the price of a good or service and the quantity supplied
The Law of Supply: the tendency for a producer to offer more of a certain good or service when the
price of it increases
Reservation Price: The minimum price per unit that a supplier will accept
Sunk Cost: A cost that once paid cannot be recovered
Fixed Costs: Factors of production that have a cost which does not change with output (e.g rent)
Variable Costs: Factors of production that have a cost which varies depending on output (e.g.
Commissions)
Price Elasticity of Supply: the percentage change in quantity supplied resulting from a 1% change in
price
• Measures the responsiveness of the supply curve to changes in price
• 1/slope times by price/quantity
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Document Summary
Market: the set of all consumers and suppliers who are willing to buy and sell that good or service at a given price. Market equilibrium: occurs when the price and quantity of a given good is stable (q consumers want to buy = q suppliers want to sell) Marginal benefit: extra benefit accrued from an additional unit --> a consumers marginal benefit is the maximum amount they are willing to pay to consume that additional unit of a good or service. Marginal cost: additional cost from the production of another unit --> a producers marginal cost is the minimum amount they are willing to sell that additional unit of a good or service. Cost benefit principle: an action should be taken when the marginal benefit is greater than the marginal cost. Economic surplus: the difference between the marginal benefit and marginal cost of taking that action. Quantity supplied: the quantity of a good or service that maximises profit.
