Economics 1021A/B Lecture Notes - Lecture 5: Allocative Efficiency, Marginal Utility, Economic Surplus

• School: Western University
• Department: Economics
• Course: Economics 1021A/B
• Professor: Nicholas Kahnert

Document Summary

When a market price allocates a scarce resource, the people who get the resource are those who are willing to pay the market price. Most scarce resources are allocated by market price. For most goods and services, the market turns out to do a good job: command, majority rule, contest, first-come, first-served, lottery, personal characteristics, force. Value is what we get, price is what we pay. The value of one more unit of a good or service is its marginal benefit. We measure value as the maximum price that a person is willing to pay. A demand curve is a marginal benefit curve. Defined as the excess of the benefit received from a good over the amount paid for it. Calculated as the marginal benefit (or value) of a good minus its price, summed over the quantity bought. Firms are in business to make a profit.