Textbook Notes (362,734)
United States (204,197)
Economics (211)
01:220:102 (140)
Chapter 5

Chapter 5 Efficiency and Equity Outline Notes

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Rutgers University
Erin Fairweather

ResourceAllocation Methods Tuesday,February 19,2013 12:50 PM • Goal of chapter is to evaluate the abilityof markets to allocate resources efficientlyand fairly • Resources mightbe allocatedby ○ Market Price  People who are willing and able to paythe price getthe resource  2 types of people decide not to pay market price □ Those who cannot afford it □ Those who are too poor and simply can't afford to buy ○ Command System- allocates resources bythe order (command) of someone in authority  Works well inorganizations in which the lines of authority and responsibility are clearand it is easytomonitor the activities being performed  Works badly when the range of activities to be monitored is large andwhen it is easyfor people to fool those in authority ○ Majority Rule  Allocates resources inthe way tat a majority of voter choose □ i.e. majority rule decides how tax dollars are allocated among competing uses suchas education and health care  Works well when decisions being made affectlarge numbers of people and self-interestmust be suppressed to use resources most effectively ○ Contest  Allocates resources to a winner □ i.e. winning a contest  People produce more when there is a prize at stake ○ First-Come, First-Served  Allocates resources to those who are firstin line  Works best when a scarce resource can serve just one user at a time in a sequence □ Byserving the user who arrives first, this method minimizes the time spent waiting for the resource to become free ○ Lottery  Allocate resources to those who pick the winning number, draw the lucky cards, or come up lucky on some other gaming system  Work best when there is no effective way to distinguishamong potential users of a scarce resource ○ Personal Characteristics  Allocatedon the basis of personal characteristics, people with the "right" characteristics getthe resources □ i.e. applying for a job ○ Force  Ill □ War- military force by one nation againstanother □ Theft- taking of the property of others without their consent  Positive □ Provides state with an effective method of transferring wealth from the rich to the poor □ Legal systemis foundation on which our market economy functions Benefit,Cost,and Surplus Tuesday,February 19,2013 1:04PM • Resources are allocatedefficientlyand in the social interest when they are used inthe ways that people value most highly • Demand, Willingness toPay, and Value ○ Value is whatwe get ○ Priceis what we pay ○ Marginal benefit- value of one more unit of a good or service  Measuremarginal benefit by maximum price that is willinglypaidfor another unit of the good or service ○ Demandcurve is amarginal benefit curve • Individual Demand and Market Demand ○ Individual Demand- relationship between the price of a good and the quantity demanded by one person ○ MarketDemand- relationship between price of a good and quantity demanded by all buyers ○ Marginal benefit = marginal social benefit ○ Market demand curve is alsothe marginal social benefit(MSB) curve • Consumer Surplus- excess of the benefitreceived from a good over the amount paid for it ○ Calculateis as marginal benefit(value) of a good minus its price, added to the quantity bought • Supply and Marginal Cost ○ Firms are in business tomake a profit  Todo so, their output for a price that exceeds the costof production • Supply, Cost, and Minimum Supply-Price ○ Producers distinguishbetween costand price  Costis whata firm gives up when itproduces a good or service  Price is what a firm receives when itsells the good or service ○ Costof producing one more uni
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