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Lecture

CHAP 5

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Department
Economics
Course
Economics 1021A/B
Professor
Jeannie Gillmore
Semester
Fall

Description
Chapter 5 – Efficiency and Equity Resource Allocation Methods 1. Market Price  When allocates a scarce resource  people who willing/able to pay that price get resource  2 kinds of people decide not to pay  those who cannot afford, can afford but chooses not to pay 2. Command  allocates resources by order of someone in authority  Canada  used in firms and government firms 3. Majority Rule  Allocates resources in way that majority of voters choose  Eg. Election for gov representatives  Works well when decision affect large # of people 4. Contest  Allocates resources to a winner (or group of winners)  Sporting events use this method  Contests do good job when efforts of players are hard to monitor and reward directly 5. First-Come, First-Serve  Allocates resources to those first in line  Eg. Many casual restaurants won’t accept reservations, highway space  Works best when scare resource can serve just one user at a time in sequence 6. Lottery  Allocate resources to those who pick the winning number, draws lucky cards or comes up on some other gaming system  Eg. Provincial lotteries, casinos, allocate landing slots to airlines in some airports etc  Works best when no effective way to distinguish among potential user of a scare resource 7. Personal Characteristics  Allocated based on people with “right” characteristics  Eg. Choose marriage partner based on personal characteristics  Or best jobs to white, anglo saxson males 8. Force  Plays crucial role for both good and ill  Ill  war, theft  Legal system  people can live daily lives with assurance that property is protected Benefit, Cost, and Surplus  Resources allocated efficiently and in social interest when used in way people value most highly 1. Demand, Willingness to Pay and Value  Getting value for money --< distinguishing between value and price  Value  what we get, price  what we pay  Marginal benefit  value one more unit of good/service   measured by max price willingly paid for another unit  demand curve = marginal benefit curve 2. Individual Demand and Market Demand  Indiv demand  Relationship b.w price of good and quan demanded by one person  Market demand  Relationship b.w price of good and quan demanded by all buyers  Marginal benefit to entire society  marginal social benefit = market demand curve 3. Consumer Surplus  when people buy something for less than its worth to them  Consumer surplus excess of benefit received from a good over the amount paid for it  Consumer surplus = marginal benefit(value) of a good – price summed over quan bought Supply and Marginal Cost  To make profit  must sell output for price that exceeds cost of production 1. Supply, Cost, and Minimum Supply-Price  Cost  what firm gives up during production  Price  what firm receives when selling good/service  Marginal cost  cost of producing one more unit, min price that produces must receive to induce them to offer one more  Supply curve = marginal cost curve 2. Individual Supply and Market Supply  Indiv supply  relationship b/w price of good and quan supplied by one producer  Market supply  relationship b/w price of good and quan supplied by all producers  Market supply curve = marginal social cost curve 3. Producer Surplus  When price exceeds marginal cost  Producer surplus  excess of the amount received from sale of good/service over cost of producing  = price received – marginal cost, over quan sold Is the Competitive Market Efficient 1. Efficiency of Competitive Equilibrium  Equilibrium in competitive market occurs when quantity demanded = quantity supplied at intersection of demand curve and supply  At this point, marginal social benefit = marginal social cost  Sum of consumer + producer surplus = total surplus 2. Market Failure  Market failure  marke
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