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Chapter 5

Chapter 5 Notes.docx

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Economics 1021A/B
Jeannie Gillmore

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Chapter 5 Notes Resource Allocation Methods  resources are scarce, so they must be allocated  allocating can be performed in several ways o market price  when a market price allocates a scare resource, the people who are willing and able to pay that price get the resource  there are two kinds of people who decide not to pay the market price: those who can afford but choose not to buy, and those too poor to buy  for many goods and services, distinguishing between those who choose not to buy and those who can’t afford to buy doesn’t matter o command  a command system allocates resources by order of someone in authority  the 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 monitory the activities being performed o majority rule  majority rule allocates resources in a way that a majority of voters choose  societies use majority rule to elect representative governments that make economic decisions  works well when the decisions being made affect large numbers of people and self-interest must be suppressed to use resources most effectively o contest  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  e/x when a manger offers everyone in the company the opportunity to win a big prize, people are motivated to work harder. Only a few ending up winning, but many people worked harder, increasing total output o first-come, first-served  a first-come, first-served method allocates resources to those who are first in line  works best when a scarce resource can serve just one user at a time in a sequence, minimizing the time spent waiting for the resource to become free o lottery  span more than just gambling; airlines at airports, fishing rights, electromagnetic spectrum used by cell phones  lotteries work best when there is no effective way to distinguish among potential users a scarce resource o personal characteristics o force  force plays a crucial role in allocating resources, as it provides the state with an effective method of transferring wealth from the rich to the poor, and it provides the legal framework in which voluntary exchange in markets takes place Benefit, Cost, and Surplus  resources are allocated efficiently and in the social interest when they are used in the ways that people value most highly  we measure marginal benefit by the maximum price that is willingly paid for another unit of the good or service o willingness to pay determine demand o thus, a demand curve is a marginal benefit curve Individual and Market Demand  the relationship between the price of a good and the quantity demanded by one person is called individual demand  the relationship between the price of a good and the quantity demanded by all buyers is called market demand o 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 price  we call the marginal benefit to entire society marginal social benefit o thus, the market demand curve is also the marginal social benefit curve, MSB Consumer Surplus  consumer surplus is the excess of the benefit received from a good over the amount paid for it  all goods are services have decreasing marginal benefit, so people receive more benefit from their consumption than the amount they pay Supply and Marginal Cost  for a firm to make profit, they must sell their output for a price that exceeds the cost of production o producers distinguish between cost and price  cost is what a firm gives up when it produces a good  price is what a firm receives when it sells the good or service  the cost of producing one more unit of a good or service is its marginal cost o the minimum price that producers must receive to induce them to offer one more unit a good o the minimum supply price determines supply  thus, a supply curve is a marginal cost curve Individual and Market Supply  the relationship between the price of a good and the quantity supplied by one producer is called individual supply  the relationship between the price of a good and the quantity supplied by all producers is called market supply o 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  we call the marginal cost to an entire society marginal social cost o thus, the market supply curve is also the marginal social cost curve, MSC Producer Surplus  producer surplus is the excess of the amount received from the sale of a good or service over the cost of producing it Efficiency of Competitive Equilibrium  equilibrium in a competitive market occurs when the quantity demanded equals the quantity supplied at the intersection of the demand and supply curves o is the condition for allocative efficiency  the sum of consumer surplus and producer surplus is called total surplus o when the efficient quantity is produced, total surplus is maximized o buyers and sellers ac
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