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Lecture

Microeconomics 1021A Chapter 5

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Department
Economics
Course
Economics 1021A/B
Professor
Ronald Wintrobe
Semester
Fall

Description
Chapter 5 Efficiency and Equity Resource Allocation Methods • Resources must be allocated by some method. • Resources can be allocated by: o Market price o Command o Majority rule o Contest o First-come, first-served o Lottery o Personal characteristics o Force Benefit, Cost, and Surplus • The value of one more unit of a good or service is its marginal benefit. • Marginal benefit can be expressed as the maximum price that people are willing to pay for another unit of the good or service. • A demand curve is a marginal benefit curve. • A demand curve shows the quantity demanded at each price. • And a demand curve shows the maximum price consumers are willing to pay for one more unit of the good or service. • The market demand curve is the horizontal sum of the individual demand curves. • We find points on the market demand curve by adding together the quantities demanded by all individuals at each price. • Consumer surplus is the excess of the benefit received from a good over the amount paid for it. • When people buy something for less than it is worth to them, they receive a consumer surplus. • The left graph shows Lisa’s demand curve, the middle graph shows Nick’s demand curve, and the right graph shows the market demand curve. • In each graph, the consumer surplus is the green area. • Calculate the consumer surplus for each graph. • Cost is what a producer gives up and price is what a producer receives. • Marginal cost is the minimum price that producers must receive to induce them to produce another unit of the good or service. • The supply curve shows the quantity supplied at a given price. • The supply curve also shows the minimum price that producers must receive to induce them to produce another unit of the good or service, so the supply curve isa marginal cost curve. • The market supply curve is the horizontal sum of the individual supply curves. • We find the points on the market supply curve by adding together the quantities supplied by all producers at each price. • Producer surplus is the excess of the amount received from the sale of a good or service over the cost of producing it. • The left graph shows Maria’s supply curve, the middle graph shows Mario’s supply curve, and the right graph shows the market supply curve. • In each graph, the producer surplus is the blue area. • Calculate the producer surplus for each graph. Is the Competitive Market Efficient? • The demand curve tells us the marginal benefit. • The supply curve tells us the marginal cost. • Where the demand curve and supply curve intersect, marginal benefit equals marginal cost. • But this condition—marginal benefit equals marginal cost—is the condition that delivers an efficient use of resources. • A competitive market puts resources to work in the activities thatcreate the greatest possible value. • So the competitive equilibrium is efficient. • In the figure, resources are used efficiently when the sum of consumer surplus and producer surplus is maximized. • The sum of consumer surplus and producer surplus is maximized when 10,000 pizzas a day are produced.
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