Scare resources might be allocated by
1. Market price: When a market allocates a scarce resource, the people who get the
resource are those who are willing to pay the market price.
2. Command: Command system allocates resources by the order (command) of someone
in authority. (Acommand system works well in organizations with clear lines of
authority but badly in an entire economy.)
3. Majority rule: Majority rule allocates resources in the way the majority of voters choose.
Societies use majority rule for some of their biggest decisions. (Majority rule works
well when the decision affects lots of people and self-interest must be suppressed to use
resources efficiently and equitably.)
4. Contest:Acontest allocates resources to a winner (or group of winners). (Contest works
well when the efforts of the “players” are hard to monitor and reward) directly.
5. First-come, first-served:Afirst-come, first-served allocates resources to those who are
first in line.
6. Sharing equally: When a resource is shared equally, everyone gets the same amount of it.
(It works best for small groups who share common goals and ideals.)
7. Lottery: Lotteries allocate resources to those with the winning number, draw the lucky
cards, or come up lucky on some other gaming system.
8. Personal characteristics: Personal characteristics allocate resources to those with the
“right” characteristics. But this method is very subjective and gets used in unacceptable
ways (allocating the best jobs to white males and discriminating against women).
9. Force: force provides an effective way of allocating resources—for the state to transfer
wealth from the rich to the poor and establish the legal framework in which voluntary
exchange can take place in markets.
1. Efficiency:Achieving an outcome that results in the greatest possible gain in the aggregate
sense. (size of economic pie)
2. Equity/ Fairness: Achieving an outcome that is equitable and fair. (distribution of pie)
Demand, Willingness to Pay, and Value
• Value is what we get, price is what we pay.
• The value of one more unit of a good or service is its marginal benefit.
• We measure value as the maximum price that a person is willing to pay.
• But willingness to pay determines demand.
• Ademand curve is a marginal benefit curve.
Individual Demand and Market Demand
• The relationship between the price of a good and the quantity demanded by one person is
called individual demand. (add up the quantity at one point)
• The relationship between the price of a good and the quantity demanded by all buyers in the
market is called market demand. (Sum up the demand to get market demand)
• Consumer surplus is the value of a good minus the price paid for it, summed over the
quantity bought. (The value of a good to a person – the price has to pay = the consumer
surplus) = total benefit- total expenditure. It is measured by the area under the demand
curve and above the price paid, up to the quantity bought. Supply and Marginal Cost
Supply, 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.
• But the minimum supply-price determines supply.
• Asupply curve is a marginal cost curve.
Individual Supply and Market Supply
• The relationship between the price of a good and the quantity supplied by one producer is
called individual supply.
• The relationship between the price of a good and the quantity supplied by all producers in
the market is called market supply.
• Producer surplus is the price received for a good minus the minimum-supply price (marginal
cost), summed over the quantity sold.
• It is measured by the area below the market price and above the supply curve, summed over
the quantity sold.
• total gain= total surplus = consumer surplus + producer surplus
Is the Competitive Market Efficient?
Efficiency of Competitive Equilibriu