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Chapter 5

Economics 1021A/B Chapter Notes - Chapter 5: Economic Surplus, Demand Curve, Marginal Utility

Course Code
ECON 1021A/B
Michael Parkin

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Chapter 5- Efficiency and Equity
Resource Allocation Methods
evaluate the ability of markets to allocate resources efficiently and fairly
we must compare it with its alternative
resources are scare, must be allocated
trading in markets i just one of several alternative methods
when a market price allocates a scarce resource, the people who are willing and able to pay that
price get the resource
those who can afford to pay but choose not to buy and those who are too poor and simply can’t
afford to buy
for many goods, distinguishing between those who choose to buy and those who can’t afford to
doesn’t matter
but for a few items, it does matter i.e. school or doctors’ fees
command system- allocates resources by the order of someone in authority
in Canada, command system is used extensively inside firms and government departments
works well in organizations in which the lines of authority and responsibility are clear and it is
easy to monitor the activities being performed
works badly when the range of activities to be monitored is large
allocates resources in the way that a majority of voters choose
societies use majority rule to elect representative governments that make some of the biggest
decisions i.e. tax rates
majority rule works well when the decisions being made affect large numbers of people and
self-interest must be suppressed to use resources most effectively
allocates resources to a winner i.e. sporting events
contests do a good job when the efforts of the “players” are hard to monitor and reward directly
allocates resources to those who are first in line i.e. casual restaurants won’t accept reservations
works best when a scarce resource can serve just one user at a time in a sequence
by serving the user who arrives first, this method minimizes the time spent waiting for the
resource to become free
allocate resources to those who pick the winning number, draw the lucky cards i.e. lotteries and
casinos reallocate millions of dollars worth of goods and services every year
lotteries are used to allocate landing slots to airlines at some airports
works best when there is no effective way to distinguish among potential users of a scarce
allocated on the basis of personal characteristics, people with the “right” characteristics get the
some of the resources that matter most to you are allocated this way

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force plays a crucial role, for both good and ill, in allocating scarce resources
war has played an enormous role historically in allocating resources
theft also plays a large role
large-scale organized crime and petty crime collectively allocate billions of dollars worth of
resources annually
force plays a crucial positive role in allocating resources, it provides the state with an effective
method of transferring wealth from the rich to the poor
a legal system is the foundation on which our market economy functions, courts to enforce
courts could not enforce contracts without the ability to apply force if necessary
force of the state is essential to uphold the principle of the rule of law
with the rule of law upheld, people can go about their daily economic lives with the assurance
that their property will be protected
free from the burden of protecting their property, people can get on with focusing on the
activity at which they have a comparative advantage and trading for mutual gain
Demand and Marginal Benefit
resources are allocated efficiently when they are used in the ways that people value most
marginal benefit equals marginal cost
determine whether a competitive market is efficient see whether, at the market equilibrium
quantity, marginal benefit equals marginal cost
value is what we get, price is what we pay
measure marginal benefit by the maximum price that is willing paid for another unit of the
good or service
willingness to pay determines demand
a demand curve is a marginal benefit curve
at what quantity is the market willing to pay $1 for the marginal slice, market demand curve
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
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 price
market demand curve is the marginal social benefit (MSB) curve
think of the price as the number of dollars’ worth of other goods willingly forgone to obtain
one more
when people buy something for less than it is worth to them, they receive a consumer surplus
consumer surplus- the value (or marginal benefit) of a good minus the price paid for it,
summed over the quantity bought
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