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Econ 5.docx

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York University
ECON 1000
George Georgopoulos

Ch. 5: Efficiency and Equity Resource Allocation Methods  market price o people who are willing and able to pay get the resource  people can choose not to pay, or people are too poor to afford it  command o command system: allocated resources by the order of someone in authority o works well in firms (job allocation) with clear lines of authority, but badly in an entire economy  majority rule o allocates resources in the way that a majority of voters choose o Works best when decisions being made affect large number of people and self-interest must be suppressed (decisions on taxes, etc.)  contest o allocates resources to a winner (or group of winners) o works well when the efforts of the "players" are hard to monitor and reward directly  first-come, first-served o allocated resources to those who are first in line o works best when a scarce resource can serve just one user at a time in a sequence  minimizes the time spent waiting for the resource to become free  sharing equally o everyone gets the same amount o works best for small groups that share a common goal  lottery o allocate resources to those that win (unlike contest, no skill is involved; luck) o works best when there is no effective way to distinguish among potential users  personal characteristics o allocates resources on the basis of personal characteristic  can be discriminatory on certain basis like job selection  force o allocated resource by force o war, theft o effective in transferring wealth from the rich to the poor  provides legal framework in which voluntary exchange in markets takes place Demand and Marginal Benefit  value: what we get o value of one more unit is marginal benefit  price: what we pay  willingness to pay determines demand o a demand curve is a marginal benefit curve  individual demand: relationship between the price of a good and the quantity demanded by one person  market demand: relationship between the price of a good and the quantity demanded by all buyers o market demand cure is the marginal social benefit cure  consumer surplus: value of a good minus the price paid for it, summed over the quantity bought o area of green triangle is sum of all surpluses = consumer surplus o area of blue rectangle shows price paid Supply and Marginal Cost  cost: what a producer gives up o cost of producing one more unit is the marginal cost  price: what a producer receives  marginal cost is the minimum price a producer must receive to offer one more unit for sale  minimum supply-price determines supply o a supply curve is a marginal cost curve  individual supply: relationship between the price of a good and the quantity supplied by one producer  market supply: relationship between the price of a good and the quantity supplied by all producers o market supply curve is the marginal social cost curve  producer surplus: price received for a good minus its minimum supply-price (marginal cost), summed over quantity sold o area of blue triangle sum of all surpluses =
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