Microeconomics - Chapter 5
Resource Allocation Methods
Two kinds of people decide not to pay the market price:
-those who can afford to pay but choose not to buy
-those who are too poor and simply can’t afford to buy
(use alternative methods to allocate resource)
Command System – allocates resources by order of command
(firms, government systems, etc.)
Majority of voters choose how resource is allocated.
Allocates resources to a winner (or a group of winners).
First come, First Served
Allocated resources to those who are first in line.
Allocate resources to those who up lucky on some a gaming system.
Allocated on the basis of personal characteristics.
Good: Government Enforcement
Value is what we get, price is what we pay.
The market demand curve is the horizontal sum of the individual demand curves
and is formed by adding the quantities demanded by all the individuals at each
A demand curve is a marginal benefit curve.
Individual demand – relationship between the price of a good and the quantity
demanded by one person
Market demand – relationship between the price of a good and the quantity
demanded by all buyers Marginal social benefit (MSB) – marginal benefit to the entire society
Consumer Surplus – excess of benefit received from a good over the amount paid for
It (marginal benefit - price summed over quantity bought)
A supply curve is a marginal cost curve.
Individual Supply – relationship between the price of a good and the quantity
supplied by one producer
Market Supply – relationship between the price of a good and the quantity supplied
by all producers
The market supply curve is the horizontal sum of the individual supply curves and is
formed by adding the quantities supplied by all the producers at each price.
Marginal Social Cost Curve (MSC) – Market supply curve
Producer Surplus – when price exceeds marginal cost/excess of the amount received
from the sale of a G or S over the cost of producing it
(price received – marginal cost summed over quantity sold)