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Lecture 5

Lecture 5 on Efficiency and Equity

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ECON 1000
Steven Edwards

ECONOMICS LECTURE FIVE: Ch.5 EFFICIENCY AND EQUITY • Resource Allocation Methods - Market Price, Command, Majority Rule, Contest, First come, First served, Sharing equally, Lottery, Personal characteristics, and Force • How does each method work? • People who are willing and able to attain product get the price. • Those that choose not to pay, those that can afford but choose not to buy, and those in a financial position that does not allow them to purchase • Not critical to those who can afford but resource allocation, fairness and efficiency. Critical to those who can not afford products/services. MARKET PRICE - When market allocates scarce resources, people who resourced are those willing to pay market price. - Most scarce resources that you supply get allocated by market price - Sell labour services to market then buy most of what you consume in market COMMAND - Allocates resources by one single authority - Command ystem works well in organizations with clear lines of authority but bad entire economy MAJORITY RULE - Allocates resources in the voting of majority voters - Societies use majority rule for some of the biggest decisions - Majority rule works well when decisions affects a lot of people and self interest must be suppreseed to use resources efficiently CONTEST - Allocates resources to a winner - Most obvious contests are sporting events - i.e. The Oscars are a type of contest. - Works well when the efforts of the players are hard to monitor FIRST COME FIRST SERVED - Allocates resources to those who are first in line - Casual restaurants use first come to allocate tables. - Works best when scarce resources can serve just one person at a time LOTTERY ECONOMICS LECTURE FIVE: Ch.5 EFFICIENCY AND EQUITY - Allocates resources to those with the winning number, draw the lucky cards, etc. - Mostly widespread lotteries and casinos Work well when there is no effective way to distinguish among potential users PERSONAL CHARACTERISTICS - Allocates resources to those right for the resource - This method gets used in inappropriate ways, ) Allocates the best job to white males and discriminates against minorities and women. FORCE - Plays a role in allocating resources - i.e. Way has played an enormous role historically in distributing resources - Theft (taking property of others without consent) - Force provides an effective way of allocating resources for the state to transfer wealth from rich to the poor. Value is what we get, price is what we pay. Value of one more unit of a good/service is its marginal benefit. - Measure value as the maximum price a person is willing to pay for one more unit (marginal benefit) - Willingness to pay determines demand - Demand curve is a marginal benefit curve • Relationship between price of a good and the quantity demanded by one person is called individual demand • Relationship between price of a good and the QD by all buyers in the market is called market demand • From individual demand curves we can combine and create a market demand curve • Lisa is wiling to buy 30 slices at a $1, Nick is willing to buy 10 slices at a $1. • The quantity demanded by all buyers in the market is 40 slices at $1 per slice. CONSUMER SURPLUS • Excess of benefit received from a good over the amount paid for it • Calculate consumer surplus as marginal benefit (value) of a good minus its price, summed over the quantity bought ECONOMICS LECTURE FIVE: Ch.5 EFFICIENCY AND EQUITY • Measured by the area under the demand curve and above the price paid up to the quantity bought • Lisa buys the 30 slice at a $1 because that is how much she is wiling to pay. Her marginal benefit is $1 more than what she actually paid for. • Sum of the surpluses of all the units purchased. • Calculation: $1.50(extra money) x 30 (QD) /2 = 22.50 • SUPPLY AND MARGINAL COST - Firms are in a business to make a profit - To make a profit firms must sell their output for a price that exceeds the cost of production - Firms must distinguish between cost and price - Cost is whatever producer gives up, price is what the producer receives - Cost of one more unit of a good/service is its marginal cost - Marginal cost is minimum price a firm is willin
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