ECON 201 Lecture Notes - Lecture 11: Economic Surplus, Reservation Price, Rationality

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14 Nov 2016
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Knowing how price and quantity change in response to economic events is not enough to tell us how much firms or consumers gain or lose from various government interventions. To measure the impact of different policies, we need to know people"s prefere(cid:374)(cid:272)es. E(cid:272)o(cid:374)o(cid:373)ists do(cid:374)"t like to (cid:373)ake assu(cid:373)ptio(cid:374)s a(cid:271)out people"s prefere(cid:374)(cid:272)es. To keep things positive, we want to make the minimal assumption about preferences. The demand curve will re(cid:448)eal (cid:449)hat a ratio(cid:374)al (cid:272)o(cid:374)su(cid:373)er"s prefere(cid:374)(cid:272)es ha(cid:448)e to (cid:271)e. The supply (cid:272)ur(cid:448)e (cid:449)ill re(cid:448)eal (cid:449)hat a ratio(cid:374)al fir(cid:373)"s prefere(cid:374)(cid:272)es ha(cid:448)e to (cid:271)e. Recall our third principle is that rational people make decisions on the margin. When deciding whether to do something, they weigh the benefit vs the cost. Rational person picks the option that gives the most benefit. If the benefit is higher than the cost, they do it. If the cost is higher than the benefit, they do something else.

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