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ECON 1050 (379)
Chapter 5

Economics Chapter 5 notes.docx

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University of Guelph
ECON 1050
Eveline Adomait

Economics Chapter 5 notes - Every time you buy something, you express your view about how scarce resources should be used - You make choices in your self interest - Market price o People willing and able to pay that price get the resource o Those who don’t: people able but unwilling, and those who cannot afford - Command o Allocates resources by the order of someone in authority o Used extensively in Canadian economy within firms and government departments o Works well in organizations with clear responsibilities and lines of authority and it is easy to monitor o Does not work well when there are a wide range of activities to be monitored and easy for people to fool those in authority - Majority rule o Allocates resources in a way that a majority of voters choose o Use majority rule to elect representative governments that make some of the biggest decisions o Works well when decisions being made affect a large number of people and self-interest must be suppressed to use resources most effectively - Contest o Allocates resources to a winner o Good when the efforts of “players’ are hard to monitor and reward directly o Total output is greater be everyone works hard to be the winner - First come, first serve o Allocates resources to those first in line o Used to allocate scarce resources o Works best when a scarce resource can serve just one user at a time in a sequence o By serving first user who arrives there is less time spent waiting for the resource to become free - Lottery o Allocates resources to those who pick the winning number, draw lucky card, etc., on some gaming system o Work best when there is no effective way to distinguish among potential users of a scarce resource - Personal characteristics o People with the “right” characteristics get the resources o Some of the resources that matter the most to you are allocated most to you are allocated this way o Ex/ marriage partner, allocating jobs to certain races - Force o By taking things of others without consent (negative) o Crucial positive role in allocating resources- provides state with an effective method of transferring wealth from the rich to the poor, provides legal framework in which voluntary exchange in markets take place o Force of the state is essential in upholding the law o With the rule of law citizens can go about their daily economic lives with the insurance that their property will be protected - value is what you get, price is what you pay - the value of one or more unit of a good/ service is is marginal benefit - meaure marginal benefit by the maximum price that is willingly paid for another unit of the good/ service - willingness to pay determines demand - a demand curve is a marginal benefit curve - the relationship between the price of a good and the quantity demanded by one person is called individual demand - relationship between the price of a good and the quantity demanded by all buyers is called market demand - when people buy something for less than it is worth to them they receive a consumer surplus- the exess of the benefit received from a good over the amunt paid for it - we can calculate consumer surplus as the marginal benefit of a good minus its price, summed over the quantity bought - all goods and services have decreasing marginal benefit, so people receive more benefit from their consumption than the amount they pay - firms make a profit when they receive more from the sale of a good or service than the cost of producing it - cost is what a firm gives up when it produces a good/ service - price is what a firm receives when it sells the good/ service - the cost of producing one more unit of a good or service is its marginal cost - marginal cost is the minimum price that producers must receive to induce them to offer one more unit of a good or service for sale - the minimum supply-price determines supply- a supply curve is a marginal cost curve - 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 al producers is called market supply - for society, the market supply curve is the marginal cost curve- we call society’s marginal cost marginal social cost - the market supply curve is also the marginal social cost cuve, or MSC - when price exeeds marginal cost, the firm receives a producer surplus - producer surplus is the excess of the amount receiver from the sale of a good/ service over the cost of producing it. It is calculated as the price received minus the marginal cost summed over the quantity soldequilibrium in a competitive market occurs when the quantity demanded equals the quantity supplied at the intersection of the demand curve and the supply curve. At this point, marginal social benefit on the demand curve equals marginal social cost on the supply curve - in equilibrium a competitive market achieves alloaed efficiency - total surplus is the sum of consumer surplus and producer surplus - when the efficient quanitity is produced, total surplus is maximixed - market failure is a situation in which a market delivers an inefficient outcome. This can occur because of underproduction or overproduction of a product - underproduction- when the total surplus is smaller than its maximized possible level. The quantity produced is inefficient. Measure the scale of inefficiency by deadweight loss- the decrease in total surplus that results from an inefficient level of production. - Overproduction- resources are wasted- inefficient production creates a deadweight loss than is borne by the entire society (social loss) Sources of Market Failure - Price and quanitiy regulations o Put a cap on permitted prices, require minimum wages, etc, block price adjustments that balance the quantity demanded and quantity supplied and lead to underproduction. Quantity regulations. - Taxes and subsidies o Taxes increase prices paid by buyers and lower prices received by sellers o Decrease quantity produced and lead t
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