ECON101: Principles of Microeconomics

Read this text on consumer surplus, producer surplus, and social (total) surplus to familiarize yourself with these concepts that enable us to measure economic efficiency.

To understand the graphical analysis of consumer surplus, let's revisit the demand curve to interpret the relationship between price and quantity as a marginal benefit. You can watch this video on the demand curve as a measure of marginal benefit. If necessary, review the concept of marginal introduced in Unit 1. Pay special attention to the difference between value and price.

Watch this video, which explains how an apple farmer decides the optimal number of apples to pick and sell. This explanation will help you understand how we measure producer surplus.

If you guess our next step is to combine consumer and producer surplus, you are right on track. We call the sum of consumer and producer surplus social surplus, total surplus, or economic surplus. Social surplus is greater at the equilibrium quantity and price than it would be at any other quantity.

This demonstrates the economic efficiency of the market equilibrium. Furthermore, at the efficient market quantity (the equilibrium quantity), it is impossible to increase consumer surplus without reducing producer surplus, and vice versa.

Watch this video, which reviews consumer and producer surplus and introduces total surplus in the context of efficiency.

Read this text on the economic inefficiency of price ceilings and price floors. We use deadweight loss to measure this inefficiency. Make sure you understand the concept of deadweight loss and how to measure it on the demand and supply graph.

The efficiency approach to price controls might be easier to understand if we use familiar examples, such as rent controls and minimum wage. Watch these two videos for an economic efficiency analysis of the adoption of a maximum price on rental housing (price ceiling) and the implementation of a minimum wage (price floor). You can use the minimum wage video to review the main features of the labor market from Unit 2.

Watch this video on President Nixon's wage and price controls in the 1970s to understand why governments enact price controls despite our economic analysis.

Read this introduction to market failure and externalities. What role does government play in correcting market failure? How might externalities affect those not directly involved in a market transaction?

Watch this video for an introduction to externalities. Learn the difference between positive and negative externalities and understand that many activities have social and private benefits and costs.

Technology and innovation provide companies with a competitive edge and generate positive externalities. Read this text to explore why private firms in a market economy might underinvest in research and technology. This reading will enhance your understanding of positive externalities.

Watch this video on how additional production can generate positive externalities. When dealing with positive externalities, the government can enhance efficiency by implementing specific measures to reduce deadweight loss. As explained in the video, a tax credit for planting trees could offset the positive externality.

Read this text on how governments promote innovation. Intellectual property rights, such as patents and copyrights, promote innovation by granting creators and companies exclusive rights over their inventions and creative works for a limited time. There are alternative policies for enhancing the rate of return on new technology, including government spending on research and development (R&D), tax breaks for research and development, and cooperative research efforts between government-funded institutions and the private sector.

Now that we have explored externality and positive externalities let's examine negative externalities. Watch this video on negative externalities. A negative externality is a cost a third party bears that results from consumption or production.

Pollution is one of the most commonly used examples of negative externalities. Read this text on the additional external costs (negative externality) specific production processes create. Make sure you understand that when a firm pollutes due to its production process, the supply curve no longer represents all social costs.

If firms had to cover the social costs of pollution, they would reduce pollution levels. This might lead to higher prices and decreased production. Watch this video on how governments use taxes to reduce negative externalities.

Read this text, which applies the production possibility frontier we studied in Unit 1 to evaluate the trade-off between economic output and policies that protect and sustain the environment.

As we have studied, market failures occur when allocating resources in a market economy leads to an inefficient outcome. We have seen how positive and negative externalities can cause market failures. Now, we focus on public goods (goods or services that are non-excludable and non-rivalrous) as a source of an inefficient allocation of resources.

Read this text on the two defining characteristics of public goods – they are non-excludable and non-rival. We explore public goods and related government intervention in more detail in Unit 8.

Read this introduction to the topic of poverty and income inequality, which are examples of market failures.

Watch this video that explains poverty, a failure of society. We can only address this failure by creating a more inclusive society. "Poverty is often described as a problem of inequitable or unjust distribution of resources. But poverty raises questions of efficiency as well as equity." (Stout, 1993)

This text explains that poverty and income inequality are related yet distinct economic concepts. We determine poverty by the number of individuals who fall below a specific income threshold known as the poverty line, the income required for a basic standard of living. On the other hand, income inequality assesses how different groups in society share total income or wealth.

Read this text and watch this video on how government programs can create a poverty trap with the programs they implement to reduce poverty. Decisions on whether it is better to work or stay home and receive government subsidies are especially difficult for workers with young children who must weigh the costs of childcare, transportation to and from the workplace, and other expenses such as clothing. Make sure you can calculate a budget constraint line that represents the poverty trap.

Watch this video on why it is so difficult for individuals to escape poverty. Note that we will return to this topic in Unit 8.

While you are now familiar with poverty, its measurement, and its potential causes, there is still room for confusion between poverty and income inequality. As we have explained, these are related but distinct concepts. It is critical to establish clear definitions and measurements of income inequality as a separate issue, although it is related to poverty.

Read this text on the sources of income inequality in a market economy, such as the changing composition of American households and shifts in the distribution of wages. What is a quintile, and how do they help economists measure income inequality? How does the Lorenz curve measure income inequality?

Watch this video to review the Lorenz curve and learn how to calculate and interpret the Gini coefficient. Note that these concepts are usually described in more detail in macroeconomics. The video also explores whether a given society can avoid income/wealth inequality.

We close this section with an analysis of how an efficient labor market can discriminate against specific sectors of society. Discrimination in labor markets arises when workers with the same skill levels receive different pay or have different job opportunities due to their gender, race, or religion.

Read this text to analyze discrimination in the labor market, how to measure it, and its relation to the housing market. Make sure you understand the controversy that surrounds public policies to reduce employment discrimination.