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Chapter 5

Chapter 5 Textbook Notes

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Department
Economics
Course
Economics 1021A/B
Professor
Michael Parkin
Semester
Fall

Description
Economics Chapter 5 Notes October 4, 2010 Resource Allocation Methods Resources must be allocated by: 1. Market Price • When a market price allocates a scarce resource, the people hwo are willing and ale to pay that price get the resource • Two kinds of people decide not to pay that price: ○ Those who can afford it but choose not to buy it ○ Those who can’t afford it • Because poor people can’t afford items that most people consider to be essential, these items are usually allocated by one of the other methods 1. Command • Command system: allocates resources by order (command) of someone in authority • in Canada, used inside firms and government departments • E.g. if you have a job, most likely someone tells you what to do. Your labour is allocated to specific task by a command • Works well in organizations in which the lines of authority are clear and it is easy to monitor activities, but works bad when the range of activities to be monitored is large and when it is easy for people to fool those in authority 1. Majority rule • Allocates resources in the way that a majority of voters choose • Societies use this rule to elect representative governments that make some of the biggest decisions • Works well when the decisions being made affect large numbers of people and self-interest must be suppressed to use resources most effectively 1. Contest • Allocates resources to a winner or group of winners • Used by sporting events • Do a good job when the efforts of the “players” are hard to monitor and reward directly • E.g. when a manager offers everyone in the company an opportunity to win a big prize, everyone works hard to get it even though only one or few people win 1. First-Come, First-Served • Allocates resources to those who are first in line 1. Lottery • Allocates resources to those who pick the winning number, draw the lucky card etc. • Work best when there is no effective way to distinguish among potential users of a scarce resource 1. Personal Characteristic • Allocates resources on the basis of personal characteristics • Good- choosing a marriage partner • Bad- best jobs to white guys 1. Force • Plays a crucial role for both good and ill • Ill – war and theft • Good – transferring wealth from rich to poor Demand and Marginal Benefit • Resources are allocated efficiently when they are used in the ways that people value most highly • This outcome occurs when marginal benefit equals marginal cost • To determine whether a competitive market is efficient, we need to see whether, at the market equilibrium quantity, marginal benefit equals marginal cost Value: of one more unit of a good or service is its marginal benefit • We measure marginal benefit by the maximum price that is willingly paid for another unit of the good or service • Willingness to pay determines demand • Demand curve is a marginal benefit curve Individual Demand: the relationship between the price of a good and he quantity demanded by one person Market demand: the relationship between the pice of a good and the quantity demanded by all buyers E.g. th • Lisa is willing to pay $1 for the 30 slice of pizza and $1 is her marginal benefit • Nick is willing to pay $1 for the 10 slice of pizza and $1 is his marginal benefit • But what quantity is the market willing to pay $1 for the marginal slice? Consumer Surplus Consumer surplus: when people buy something for less than it is worth • the value (or marginal benefit) of a good minus the price paid for it, summed over the quantity bought Supply and Marginal Cost • 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 producer gives up, and price is what a producer receives • cost of producing one more unit of a good or service is its marginal cost ○ marginal cost: minimum price that produces must receive to induce them to offer one more unit of a good or service for sale • minimum supply price determines supply • supply curve is a marginal cost curve Individual Supply: the relationship between the price of a good and the quantity supplied by one producer Market Supply: the relationship between the price of a good and the quantity supplied by all producers • 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 • e.g. th ○ max is willing to produce the 100 pizza for $15, his marginal cost of that pizza th ○ Mario is willing to produce the 50 pizza for $15, his marginal cost of that pizza Producer Surplus: when price exceeds marginal cost • The price r
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