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Chapter 5

Chapter 5.docx

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University of Lethbridge
ECON 1010
Pascal Ghazalian

Chapter 5: Efficiency and equity Efficency- A Refresher - An efficient allocation of resources occurs when we produce the goods and services that people value the most highly. - Resources are allocated efficiently when it is not possible to produce more of a good or service without giving up some other good or service that is valued more highly. - Efficiency is based on value, which is determined by people’s preferences. - If the marginal cost of a good equals its marginal benefit, resources are being used efficiently. Value, Price and Consumer Surplus - The value of one more unit of a good or service is its marginal benefit, which we can measure as the maximum price that a person is willing to pay - A demand curve for a good or service shows the quanitiy demanded at each price - A demand curve also shows the maximum price that consumers are willing to pay at each quantity. - The figure shows these two ways of interpreting a demand curve. o A) The demand curve tells us quantity that consumers plan to buy at a given price. o B) The demand curve tells use the maximum price that consumers are willing to pay for a given quantity. This price measures the marginal benefit of a good at a given quantity - Consumer surplus is the value of a good minus the price paid for it, summed over the quantity bought. o It is measured by the area under the demand curve and above the price paid, up to the quantity bought. - The price paid is the market price, which is the same for each unit bought. - The quantity bought is determined by the demand curve, and the blue rectangle show the amount paid for pizza. - The green triangle shows the consumer surplus from pizza. - The consumer surplus on the 10 slice is the $2 that the consumer is willing to pay minus the $1.50 that she does pay, which is 50 cents a slice Cost, Price and Producer Surplus - The cost of one more unit is its marginal cost which we can measure as minimum price that a firm is willing to except. - A supply curve of a good or service shows the quantity supplied at each price. A supply curve also shows the minimum price that producers are willing to accept at each quantity. - The figure shows two ways of interpreting a supply curve
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