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Lecture 5

Economics 1021A/B Lecture Notes - Lecture 5: Social Cost, Marginal Utility, European Cooperation In Science And Technology


Department
Economics
Course Code
ECON 1021A/B
Professor
Michael Parkin
Lecture
5

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CHAPTER 5 EFFICIENCY AND
EQUITY
RESOURCE ALLOCATION METHODS
Because resources are scarce, we must allocate (distribute) them somehow to the people
So what determines how and to whom we distribute these resources to?
1) MARKET PRICE
The price of a good or service differentiates between the people who are willing and those who
are not willing to pay for it at that price
Some may be too poor to pay the price while others may choose not to pay as the good is not
worth that much to them
2) COMMAND
Resources that are allocated by authority
For example in a job, the command system will allocate specific tasks for you to perform
Works well when authority is clear and it is easy to monitor activities
3) MAJORITY RULE
Decides government and also things like tax rates that will be allocating scarce resources
4) CONTEST
Winner of the contest is rewarded and allocated the scarce resources
When a contest and prize is offered, people are willing to work harder which increases output
5) FIRST COME FIRST SERVE
Whoever gains access to the resource is who gets it
Highway space is allocated this way , cars that get there first gets road space and as more show
up later, the speed slows and people have to wait in line to enter the road with traffic
6) LOT TERY
Resources are allocated by chance
Not only casinos but also used to allocate landing slots in airlines, places in marathons
Used when there is no other way to distinguish between users of the resource
7) PERSONAL CHARACTERISTICS
The people with the right fit for the resources are the people who get them
Example: marriage partner, best fit for jobs (can lead to discrimination based on characteristics)
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8) FORCE
Not necessarily a bad thing
Includes laws that rules that enforce business contracts and it is needed to keep a civilized
economy where property is protected
BENEFIT, COST AND SURPLUS
DEMAND, WILLINGNESS TO PAY, AND VALUE (MARGINAL BENEFIT)
Value is what we get and price is what we pay
The value of a good is the marginal benefit
oRecall that the marginal benefit is the maximum amount we are willing to pay for that
good
oThis is essentially how much we value that good
Willingness to pay is therefore what determines the demand (how much we want to pay
determines how much we demand it)
Demand curve is the marginal benefit curve
oMarginal benefit curve is willingness to pay vs. quantity of the good
oDemand curve is price vs. Quantity demanded
oEssentially they are the same thing
If Lisa is willing to $1 for the 30th slice of pizza, then quantity demanded is 30 and the marginal
benefit of that is $1
INDIVIDUAL DEMAND AND MARKET DEMAND
Quantity demanded by one person is called individual demand
Quantity demanded by all buyers in the market is called market demand
Market demand curve is the horizontal sum of all the individual quantities demanded at the
specific price
Market demand curve is also known as the marginal social benefit (MSB) curve
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CONSUMER SURPLUS
We don’t always have to pay how much we are willing to pay, sometimes we can get it for
cheaper
Definition: consumer surplus is the excess benefit received from a good over the amount paid for
it
= marginal benefit (how much we are willing to pay) - the actual price it is bought for, summed
over the quantity bought
To Lisa, the 30th slice of pizza is worth exactly $1 to her, but the 10th slice of pizza is worth $2
(her marginal benefit for the 10th slice is $1 more than she actually pays for it)
oHowever, she is able to get all 30 slices of pizza for $1 each instead
oTherefore she received a surplus of $1 on the 10th slice of pizza
Her consumer surplus of the sum is the surpluses of all the slices she buys (30 in this case)
oArea of the triangle below the demand curve and above the market price line
The area under the market price line shows the amount of money Lisa has to pay for her 30 slices
of pizza
SUPPLY, MARGINAL COST AND MINIMUM SUPPLY-PRICE
Cost is what the company must give up to produce a good and price is what the company
received when the good is sold
Marginal cost is the minimum supply price
oMarginal cost is the cost it takes to produce one more unit of it
oBecause they must at least break even and cannot lose money by selling it for less
Supply curve is the marginal cost curve
oMarginal cost curve: marginal cost vs quantity
oSupply curve: price vs quantity supplied
oThey are essentially the same
Maria is willing to produce the 100th pizza for $15 a slice
oQuantity supplied is 100
oMinimum supply price and marginal cost is $15
INDIVIDUAL SUPPLY AND MARKET SUPPLY
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