Chapter 5 Flashcards
Resource Allocation Methods
- Market price
- Command
- Majority rule
- Contest
- First-come, first-served
- Sharing equally
- Lottery
- Personal characteristics
- Force
Value vs price
Value: what we get
Price: what we pay
Marginal benefit
The value of one more unit of a good or service
Value
The maximum price that a person is willing to pay.
Consumer surplus
The value of a good minus the price paid for it, summed over the quantity bought.
Cost vs price
Cost: what the producer gives up
Price: what the producer receives
Marginal cost
The cost of one more unit of a good or service
Marginal price
The minimum price that a firm is willing to accept.
Producer surplus
The price received for a good minus the minimum-supply price (marginal cost), summed over the quantity sold.
The invisible hand
Adam Smith’s idea in the Wealth of Nations that implies that competitive markets allocate resources to their highest valued use in society.
Consumers and produces pursue their own self-interest and interact in markets.
Market transactions generate and efficient - highest valued - use of resources.
Deadweight loss
Measures the scale of inefficiency.
It is the decrease in total surplus that results from an inefficient level of production.
This loss is a social loss.
Sources of market failure.
- Price and quantity regulations
- Taxes and subsidies
- Externalities
- Public goods and common resources
- Monopoly
- High transaction costs.
Utilitarianism
The principle that states that we should strive to achieve “the greatest happiness for the greatest number”.
Symmetry principle
The requirement that people in similar situations be treated similarly.
Meaning of the symmetry principle in economics
Equality of opportunity (not equality of income)
