Oct 3, 2011
Economics - Textbook Notes
Resource Allocation Methods
When a market price allocates a scarce resource, the people who are willing and able to
pay that price get the resource. Two kinds of people decide no to pay the market price:
those who can afford to pay but choose no to buy, and those who are too poor and simply
cant afford to buy.
A command system allocates resources by the order (command) of someone in authority.
A command system works well in organizations in which the lines of authority and
responsibility are clear and it is easy to monitor the activities being preformed. But a
command system works badly when the range of activities to be monitored is large and
when it is easy for people to fool those in authority.
Majority rules allocated 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. Majority ruls works well when the decisions being made affect large numbers
people and self-interest must be suppressed to use resources most effectively.
A contest allocates resources to a winner (or a group of winners). Contests do a good job
when the efforts of the “players” are hard to monitor and reward directly.
A first-come, first-served method allocated resources to those who are first in line. It
works best when a scarce resource can serve just one user at a time in a sequence by
serving the use who arrives first, this method minimizes the time spent waiting for the
resource to become free.
Lotteries allocate resources to those who pick the winning number, draw the lucky card,
or come up lucky in some other gaming system. They work the best when there is no
effective way to distinguish among potential users of a scarce resource.
When resources are allocated on the basis of personal characteristics, people with the
“right” characteristics get the resources. Some of the resources that matter most to you
are allocated in this way.
Force plays a crucial role, for both good and ill, in allocating scarce resources. Nicole Wallenburg
Oct 3, 2011
Demand and Marginal Benefit
Demand, Willingness to Pay, and Value
The value of one more unit of a good or service is its marginal benefit. And we measure
marginal benefit by the maximum price that is willingly paid for another unit of the good
or service. But willingness to pay determines demand. A demand curve is a marginal
Individual Demand and Market Demand
The relationship between the price of a good and the quantity demanded by one person is
called individual demand. And the relationship between the price of a good and the
quantity demanded by all buyers is called market demand.
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
The market demand curve is the marginal social benefit (MSB) curve.
When people buy something for less than is it worth to them, they receive a consumer
surplus. A consumer surplus is the value (or marginal benefit) of a good minus the price
paid for it, summered over the quantity bought. All goods and services have decreasing
marginal benefit, so people receive more benefit from their consumption than the amount
Supply and Marginal Cost
Supply, Cost, and Minimum Supply-Price
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. 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. But the minimum supply-price determines
supply. A supply curve is a marginal cost curve.
Individual Supply and Market Supply
The relationship between the price of a good and the quantity supplied by one producer is
called individual supply. And the relationship between the price of a good and the
quantity supplied by all producers is called market supply.
The market supply curve is the horizo