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
- 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
- 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