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Lecture 7

Economics 1021A/B Lecture Notes - Lecture 7: Market Failure, Marginal Utility, Demand Curve


Department
Economics
Course Code
ECON 1021A/B
Professor
Michael Parkin
Lecture
7

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Chapter 5: Efficiency and Equity
Scare resources might be allocated by
oCommand
oMajority rule
oContest
oFirst come, first served
oLottery
oPersonal characteristics
oForce
oMarket price
Allocatively efficiency
oMarginal social benefit = marginal social cost
Market price
oMarket allocates a scarce resource, person who pays the highest gets the resource
oMost scarce resources are allocated by market price
Sell labor services in market, buy things consumed in markets
Demand, willingness to pay, and value
oValue is what we get, price is what we pay
oValue of one more unit of good or service is its marginal benefit
oMeasure value as the maximum price that a person is willing to pay
oWillingness to pay determines demand
oDemand curve = marginal benefit curve
Benefit cost and surplus
oMarket demand curve is horizontal sum of the individual demand curves
oConsumer surplus
Defined as the excess of the benefit received from a good over the amount
paid for it
Calculated as the marginal benefit of a good minus its price, summed over
the quantity bought
oSupply and marginal cost
Firms are in business to make a profit
To make profit, firms must sell their output for a price that exceeds the
cost of production
Firms distinguish between cost and price
oSupply, cost and minimum supply price
Cost is what the producer gives up, price is what the producer receives
The cost of one more unit of a good or service is its marginal cost
Marginal cost is the minimum price that a firm is willing to accept
oMinimum supply price determines supply
oSupply curve is a marginal cost curve
Is the competitive market efficient
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