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ECON 1000 Cha. 5 Notes.docx

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York University
ECON 1000
Sadia Mariam Malik

Econ Cha. 5 Jot Notes Resource Allocation Methods  Market Price - people who are willing and able to pay gets the resource - school tuition/doctor fees are usually allocated by one of the other methods since poor people can’t afford to pay what seems like essentials for most people.  Command - A command system allocates resources by the command of someone in authority - In the Canadian economy, the command system is used extensively inside firms and gov departments - Works well in organizations in which lines of authority and responsibility are clear and it’s easy to monitor the activities being performed (North Korea has a bad command system)  Majority rule - Used In elections, tax rate decisions, budget allocation - Works well when the decisions being made affect large numbers of people and self interest must be suppressed to use resources most effectively  Contest - Allocates resource to a winner or a group of winners (ex. sporting events) - Works well when efforts of the participants are hard to monitor and reward directly (ex. in organizations when the manager offer everyone a chance to win a big prize)  First-come, first-served - Used in restaurants, highway space, etc - Works well when a scarce resource can serve just one user at a time in a sequence  Lottery - Used in allocating landing slots to airlines at some airports, places of sporting events - Works well when there is no effective way to distinguish among potential uses of a scarce resource  Personal characteristics - People with the “right” characteristics get the resources (ex. choosing a marriage partner) - This allocation method can also be used in unethical ways (ex. choosing to hire white males > others in a work place)  Force - Negative role: war and war-time goods allocation, theft (small scale burglars & large scale organizational crimes) - Positive role: wealth transferring from rich -> poor, legal systems, the principles of the rule of law Benefit, Cost, and Surplus - Resources are allocated efficiently and in the social interested when they are used in the ways that people value the most. (when quantity produced is at which marginal benefit = marginal cost) Demand, Willingness to Pay, and Value - Marginal benefit is measured by the max price that is willingly paid for another unit of good/service - The willingness to pay determines demand - Therefore, the demand curve is the marginal benefit curve Individual Demand and Market Demand - Individual demand – the relationship between the price of a good and the quantity demanded by 1 person - Market demand – the relationship between the price of good and quantity demanded by all buyers - Market demand curve = marginal social benefit curve (MSB) Consumer Surplus - Consumer surplus – the excess of the benefit received from a good over the amount paid for it - Calculation: area of triangle above market price - Consumer surplus for the market = sum of individual consumer surplus - All goods/services have decreasing marginal benefit, so people receive more benefit from their consumption than the amount they pay Supply and Marginal Cost - Businesses want to make a profit, to do so, their marginal cost must be < than their price Supply, Cost, and Minimum Supply-Price - Marginal cost – the cost of producing 1 more unit of good/service - Marginal cost is the minimum price that producers must pay to offer one more unit of good/service for sale - A supply curve is a marginal cost curve Individual Supply and Market Supply - Individual supply – the relationship between the price of a good and quantity supplied by 1
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