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ECON 1050 (379)
Chapter 5

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University of Guelph
ECON 1050
Eveline Adomait

Economics Chapter 5 Efficiency and EquityResource Allocation Methods Resources are scare and must be allocated somehowResources might be allocated byMarket Price the people willing and able to pay the price get the resource People who dont pay market price dont for 2 reasons1 They can afford to but choose not to 2 They are too poor and cannot buyCommand allocates resources by the order of someone in authorityUsed in governments and firms works well in organizations bad in places like North Korea Majority Rule voters choose Used in ways to elect governments and how to allocate tax dollarsWorks well when decision being made affects a large number of people and selfinterest must be suppressed to use resources efficient Contest allocates resources to a winnerSports computer contests etc Does a good job when efforts of player are hard to monitor and reward directlyFirstcome Firstserved allocates resources to those first in lineLottery allocates resources to those who pick the winning number draw the right card etcWorks best when there isnt an effective way to distinguish among potential users of a scarce resourcePersonal Characteristics resources are allocated on the basis of personal characteristics people with right characteristics get the resources Marriage Not right when discrimination is usedForce ill war theft Provides the state with an effective way to transfer wealth from rich to poor and provides the legal framework in which voluntary exchange in markets takes placeDemand and Marginal Benefit When marginal benefitmarginal cost resources are used efficiently and in ways that people value most highlyDemand willingness to pay and valueGetting value for money The value of one more unit of a goodservice is its marginal benefitWillingness to pay determines demandA demand curve is a marginal benefit curveIndividual Demand and Market DemandIndividual Demand the relationship between the price of one good and the quantity demanded by one personMarket Demand the relationship between the price of goods and the quantity demanded by all buyersMarket Demand Curve the horizontal sum of all the individual demand curves and it is formed by adding all quantities demanded by all individuals at each priceConsumer Surplus When people buy something for less than it is worth to them they receive a consumer surplusMarginal benefit price paidquantity bought Consumer surplus is the sum of the surplus of all bought
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