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### Course: Microeconomics>Unit 9

Lesson 1: Externalities

# Allocative efficiency and marginal benefit

Marginal Utility and maximization. Created by Sal Khan.

## Want to join the conversation?

• So wait if MB is what you are willing to pay what is MC?? I got a little lost in the process.
• Ok...the MC (Marginal* Cost) is something that can be determined mathematically: it is essentially equivalent to the opportunity cost, aka what you are giving up in the pursuit of one more unit. The MB (Marginal* Benefit) is something that cannot be determined mathematically: this is where the person/company/nation graphs their OPINION on how much they'd be willing and able to give up for one more unit of the product at hand, in this case rabbits. The point where these two lines meet (if they meet) is the point where both parties should(?) be able to reach an agreement. Because the MB and MC are equal, the reason for trade would be b/c Person A prefers gathering object A to hunting object B, or vice versa, and the Person B prefers gathering/hunting the opposite of what Person A prefers.

*Marginal="relating to goods or services produced and sold at the margin of profitability" [Dictionary.com]

Hope this helps.
• I don't understand Allocative Efficiency part. I watched like 5 times and still don't what is it?
• Erm...The way I see it, it's the way in which to allocate your time most efficiently. So (uh, how do I explain this)...say I have a project and a test, both due for 3 days from now. If I work too long on the project, I might not know everything I need to know for the test. Similarly, studying too long for the test will probably mean I do a half baked job of the project. Allocative efficiency is achieved when I reach the point where I'm fine with both grades, or (to put it another way) when I think I'm giving up too much for one grade over the other, and vice versa. This can be expressed in the form where Marginal Cost= Marginal Benefit.

Going back to my (admittedly bad) grades example, let's say that with my current scheduling, I'll get a 100 on the test and a 60 on the project. If I work one more hour on the project, I'll lose some time to study on the test (b/c I'm working on the PPF, at full efficiency). That loss of study time means that my grade on the test will drop by 10 points. However, this also means that my grade on the project will rise by 10 points. That doesn't sound so bad to me; in fact it sounds good, because I'm fine with a 90 on the test (I want at least an 80), and I'm happier with a 70 on the project. (Let's say I want an 80 here too.)

This represents a point where the MB is higher than the MC, because I'm willing to give up more than what it costs.

Let's jump to the point where I reach allocative efficiency. In my example, I would think it's when I have an 80 for both the project and the test. (Correct me if I'm wrong, please.) At this point, to work longer on the project would be too much of a cost to me, because my grade would drop below what I'm willing to give up (it'd drop below 80, and I want at least an 80). Similarly, I don't see any point in studying more for the test. Thus, I've reached a point where the MC (what I give up) = MB (what I'm willing to give up). At this point, I've figured out what I need to do to allocate my time for the best scenario in my opinion: allocative efficiency. Hope this helped.
• Marginal cost = opportunity cost of one more unit

Opportunity cost = highest-valued alternative we must give up to get something (the total amount of what you have to give up to get something)
• how Did he calculate the Marginal Benefit starting from 8.46 ?
• He made those numbers up on the spot. There's no math behind it.
• I thought it was called marginal utility, not marginal benefit?
• So, marginal benefit is marginal revenue later, am I right?
• No: Revenue is a supplier concept, while benefit is a consumer concept.
• what if at the end of the day you got 5 rabbits and on your way home and you just so happen to stumble across another rabbit. Then wouldn't that turn the impossible area into an extremely unlikely area?
• I can see where your question is coming from, and it's a good one. The PPF works on a set of assumptions and conditions. Very crucially, it assumes that these results are all that is possible. There are no "accidental" rabbit or berry discoveries. The example used is a very basic one to help explain the concept. As you get more advanced, you will consider firms (businesses) and their production trade-offs. Just as Apple cannot stumble upon 1 million iPhones it didn't think it was able to produce, the hunter/gatherer cannot stumble upon a rabbit. With that said, it's good you're thinking critically about what you're learning. Questioning what might normally be "assumed" or considered basic is a key to learning and discovery.
• Wouldn't catching rabbits be more profitable because rabbits provide more energy (calories) than berries?
• You also need a demand for rabbits over berries, and make sure you have less supply than demand so you can wrack up the price.
(1 vote)
• I understand that you must be inside the PPF, but can one get 5 rabbits AND one berry? Say a berry falls into the person's pouch when he is hunting rabbits or something like that. Would this sort of situation not be considered?