Customer benefit and marginal benefit, Firm’s costs

Reference: Carlton and Perloff Ch 2, pp. 29-47

Frank, Jennings, and Bernanke, Chs 5&6

In this lecture we review

  • how individual consumers’ and market marginal benefit (demand) is described
  • the nature of the costs that firms face.

In first year you will have talked about consumers’ and market demand curve. We will see that when the firm uses ‘linear pricing’ the marginal benefit curve is the firm’s demand curve.

Marginal benefit (MB) curves

MB curves summarise customers’ willingness to pay.

To fully explore this property we consider the different cases in which the good:

  1. comes in discrete units (e.g. movie tickets)
  2. is infinitely divisible (e.g. corn flakes)

With each type of good we consider:

  1. Individual consumer’s MB
  2. The market MB

Let’s consider these cases.

MB with discrete units

First consider the case in which the good comes in discrete units. Here’s an example of two people’s benefit from using movie tickets:

  Total Benefit

(Utility in $)

Quantity

(Movies a month)

  Elle Joy  
1   30.00 25.00  
2   50.00 40.00  
3   60.00 45.00  
4   62.00 45.00  
5   62.00 45.00  

The marginal benefit (MB) shows us how much each person would be willing to pay for an additional movie (unit).

  Marginal Benefit

($ per unit)

Quantity

(Movies a month)

  Elle Joy  
1   30.00 25.00  
2   20.00 15.00  
3   10.00 5.00  
4   2.00 0.00  
5   0.00 0.00  

We often call the MB the ‘willingness to pay’, because it tells us the maximum a consumer would be willing to pay for an additional unit…………………………………………………..

 

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