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| | For once, this is an economic term (“efficiency”) that has the same meaning as its common everyday usage. “It was an inefficient use of my time to sit here all morning waiting for you!” “Try to do your chores more efficiently so that you can finish sooner.” “She finishes her homework faster than you because she works more efficiently.” | | For once, this is an economic term (“efficiency”) that has the same meaning as its common everyday usage. “It was an inefficient use of my time to sit here all morning waiting for you!” “Try to do your chores more efficiently so that you can finish sooner.” “She finishes her homework faster than you because she works more efficiently.” |
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| − | Generally, maximum efficiency is desired and people want to avoid wasted time, materials, effort, and expense. However, there is a significant obstacle to true efficiency: transaction costs. Recall that “transaction costs” are all the incidental expenses that a consumer must spend to acquire a good. One textbook defines transaction costs as “the time, effort, and expense that go into the purchase of a good.” (Spencer, Contemporary Economics, at p. D-53). Nobel laureate Ronald Coase, discussed below, describes “transaction costs” as simply the “costs of using the market.” | + | Generally, maximum efficiency is desired and people want to avoid wasted time, materials, effort, and expense. However, there is a significant obstacle to true efficiency: transaction costs. Recall that “transaction costs” are all the incidental expenses that a consumer must spend to acquire a good. One textbook defines transaction costs as “the time, effort, and expense that go into the purchase of a good.”<ref>Spencer, Contemporary Economics, at p. D-53).</ref> Nobel laureate Ronald Coase, discussed below, describes “transaction costs” as simply the “costs of using the market.” |
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| | If you love the homemade ice cream at your favorite restaurant, then you have to spend the time and money driving there, waiting for a table, tipping the waitress, paying the sales tax, etc. All you wanted was the homemade ice cream, but many transaction costs stand in the way of a perfectly efficient transaction. | | If you love the homemade ice cream at your favorite restaurant, then you have to spend the time and money driving there, waiting for a table, tipping the waitress, paying the sales tax, etc. All you wanted was the homemade ice cream, but many transaction costs stand in the way of a perfectly efficient transaction. |
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| | Some transaction costs are imposed by governmental regulations. In many areas, homeowners must receive permission to chop down trees on their yards or build an addition. The time and expense in obtaining that approval by the local zoning board are transaction costs. | | Some transaction costs are imposed by governmental regulations. In many areas, homeowners must receive permission to chop down trees on their yards or build an addition. The time and expense in obtaining that approval by the local zoning board are transaction costs. |
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| | + | == Marginal Cost and Marginal Revenue == |
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| | + | Two of the most important concepts in economics are '''''marginal cost''''' and '''''marginal revenue'''''. We introduce these concepts now, and will use them throughout the remainder of this course. |
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| | + | '''''Marginal cost''''' is the additional cost to produce '''''one more unit'''''. It includes only the additional cost, and not any costs to produce anything else. If, for example, you drove to the grocery store and then saw another store 100 feet up the road, the marginal cost of driving to that store would be only the gas and time and wear and tear on the car for going the extra 100 feet. The marginal cost would not include the overall cost of the car, or your taking off a day from work, or anything other than the cost of going that extra 100 feet. |
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| | + | Similarly, the '''''marginal revenue''''' is the additional revenue received by a business for selling '''''one more unit'''''. It is the same as the price of the unit, because revenue is PxQ and Q (quantity) is 1. |
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| | + | Imagine yourself as an owner of a business. As long as marginal revenue is larger than marginal cost, then you will want to sell more and more units. But once marginal revenue falls below your marginal cost, then you lose money for each additional unit. You will lose money in selling more goods at that point. |
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| | + | An owner sells as many goods as he can until marginal revenue falls to equal marginal cost. At that point he does not make any more money selling goods, and he stops selling additional goods. |
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| | + | Example: a grocery store owner considers how late he should keep his store open at night. His marginal cost includes electricity and wages for employees. His marginal revenue includes the groceries purchased by the late-night shoppers. Once the volume of groceries falls late at night to the point where his marginal revenue from those sales dips below his marginal cost for keeping the store open, he closes his store for the night. |
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| | ==The Coase Theorem== | | ==The Coase Theorem== |