Benefits and Costs, Supply and Demand (Lec.

3-4)
Chapter-3
Instructor: Tural Gojayev Azerbaijan University 2022
 Learning Objectives
 Willingness to Pay
• Marginal willingness to pay;
• Total willingness to pay;
 Demand
• Demand and marginal willingness to pay;
 Benefit
• Willingness to pay and Benefit;
 Cost
• Types of costs (private, social etc.)
 Technology
• Technological improvement
 Willingness to Pay
 The value side of the analysis is based on the
fundamental notion that individuals have preferences
for goods and services;
 Given a choice, they can express preferences for one
good over another or one bundle of goods over
another bundle.
 Willingness to Pay
 The value of the good to a person is what the person is willing and
able to sacrifice for it. Sacrifice what?
- based on individual values
 In a barter economy, the willingness to sacrifice for one thing
would be expressed in terms of some other thing.
 Ability to pay
 A person’s willingness to pay for pounds
of organic potatoes per week
1. Assuming he or she has no organic potatoes at present, how much would
he or she be willing to pay for one pound? Suppose the answer is $3.80.

2. Assuming he or she presently possesses one pound, how much is he or she

willing to pay for the second pound? Assume he or she answers $2.60.

3. Assuming he or she possesses two pounds, how much would he or she be

willing to pay for a third pound? Assume he or she answers $1.70.

4. How much is he or she willing to pay for additional potatoes? Assume he

or she answers $1.40 for the fourth, 90¢ for the fifth, 60¢ for the sixth, and
nothing for the seventh.
Willingness to pay
 Marginal willingness to pay
• The next step is to distinguish between total and marginal
willingness to pay. This is the marginal willingness to pay
—in this case, for the third unit.
• Marginal is thus a word that describes the additional
willingness to pay of a person for one more unit. So the height
of the rectangles in the left side of Figure 3.1 shows the marginal
willingness to pay for this good.
 Total willingness to pay
 The total willingness to pay for a given consumption level is
the total amount a person would be willing to pay to attain that
consumption level.
 Suppose the person is consuming at a level of three units, his or her
total willingness to pay for consuming this quantity is $8.10, which
is in fact the sum of the heights of the demand rectangles between
the origin and the consumption level in question ($3.80 for the
first, plus $2.60 for the second, plus $1.70 for the third).
 DEMAND
 There is another way of looking at these marginal
willingness-to-pay relationships.
– They are more familiarly known as demand curves. An
individual demand curve shows the quantity of a good
or service that the individual in question would
demand (i.e., purchase and consume) at any particular
price.
 Demand/marginal willingness-to-
pay curve
 An individual’s demand/marginal willingness-to-pay curve
for a good or service is a way of summarizing his or her
personal consumption attitudes and capabilities for that
good.
– Thus, we would normally expect these relationships to differ
somewhat among individuals, because individual tastes and
preferences
Typical Demand/Marginal Willingness-to-Pay
Curves
 Aggregate Demand/Willingness to Pay
 In examining real-world issues of environmental quality and
pollution control policy, we normally focus our attention on the
behavior of groups of people rather than single individuals.
 Our interest is in the total, or aggregate, demand/marginal
willingness to pay of defined groups of people.
 Aggregate Demand/Willingness to Pay
 An aggregate demand curve is the summation of a number of
individual demand curves.
 What individuals are involved depends on which particular
aggregation we want to look at: the demand of people living in
the city of New York for brussels sprouts; the demand of people
living in New Orleans for clean water in the Mississippi River;
the demand of people living in the entire country for public
parks; and so on.
Aggregate demand curve
 BENEFITS
 We now come to the idea of benefits.
 Benefit is one of those ordinary words to which
economists have given a technical meaning. When the
environment is cleaned up, people obtain benefits;
when the environment is allowed to deteriorate in
quality, benefits are taken away from them—they are, in
fact, being damaged.
 The benefit that people get from something is equal to the
amount they are willing to pay for it.
Willingness to pay and benefits
 COST
 Opportunity cost – refers to the value of what you have to
give up in order to choose something else. (It’s a value of
the road not taken)
 Private cost
 Social cost
- Difference between private and social cost?
 Cost Curves
To summarize cost information, we use cost curves, which are
geometric representations of the costs of producing something.
And, just as in the case of willingness to pay, we
differentiate between marginal costs and total costs.
The Concept of Marginal Cost
 Total Production cost
 Marginal cost curves can be used to determine total production costs. On
the stepped marginal cost curve of Figure 3.5, suppose we want to know
the total cost of producing five units of this item.
 This is equal to the cost of the first unit ($5), plus that of the second ($7),
plus that of the third ($10), and so on.
 The total cost of producing 4.5 units of output is thus given by the area
marked “a” in the figure.
 TECHNOLOGY
• The most important factor affecting the shapes of marginal
cost functions is the technology of the production process.
• This concept of technology is vitally important in
environmental economics because technological change can
provide ways to produce goods and services with fewer
environmental side effects and also better ways of handling
the quantities of production residuals that remain.
Technological Improvement
 Conclusion
 In this chapter, we covered briefly some of the basic tools
of microeconomics.
 Later chapters will rely heavily on these ideas, especially
on the “equimarginal” principle and on graphs, where
we will want to jump back and forth between marginal
and total measures.