Class #6, 2/7/12

• Today, we learned a lot about the area under curves.
• The area beneath the demand curve= not a precise measurement, but nonetheless a measurement of how much value a person gets by doing something
• Key things to know when analyzing a curve/problem set in ECON 207:
• How much of something you start with and how much I'm going to get/takeaway.
• How much you get of something is contingent upon how much you already have.
• Marginal Value- any particular point on someone's demand curve, how much pleasure you get from consuming the very next unit
• Total Value- Approximated by the area below the demand curve- or in other words, how much pleasure you get from consuming a particular quantity of a good
• (See demand/supply curves from class)
• In class, Prof. Rizzo gave us examples of supply/demand curves of soda. By doing this, he explained to us how we can maximize value. So we have 1 soda- who wants it more? To maximize value, you should give it to the person who values it the most. If we then have a 2nd soda, we should give it to the person who has the next most value for the soda, and so on (keep in mind that as we move down the demand curve, people will value the next soda at a lower price. If I value my first soda at $15, I might value a second soda at $12, etc. So, if Joe values his first soda at $14 and 2nd soda at $11, I should get the first soda and Joe should get the second soda.) By doing this, we can accumulate a greater total value.
• The area below the supply curve = total cost a firm would endure when producing a certain amount of units (Q) of a good.
• By combining the supply and demand curves, and looking at the area beneath the curves, we see cost structure- for a firm, they would not sell a good if it costs more to make a good than they could make trying to sell it. If they did do this, that would be irrational!
• Pareto Efficient means to make everyone better off, at least one person has to be worse off. Pareto Efficient means that all possible improvements to a market have occurred.
• The willingness of someone to pay= the ability to pay and how much you value that something
• One final example: Let's say we produce 28 apples and we decide to make the 29th. Is this a good or bad idea? Well, this all depends on the total value society as a whole has on the next apple being produced compared to the cost of making it. But if making the 29th apple costs more than the pleasure we get from it, this is a waste of production because we would've gotten more pleasure producing something else for society- opportunity cost. At the same time, the market allows us to not stop producing apples when society has a high value for them, a value for them that exceeds the cost. The market regulates this.