Chapter 5: Efficiency & Equity Flashcards
What does it mean to allocate resources?
How can we obtain scarce resources
What are the 8 alternatives to allocate resources?
- Market price
- Command
- Majority rule
- Contest
- First come, first served
- Lottery
- Personal characteristics
- Force
7.
How do you allocated resources with market price?
People who are willing and able to pay get the resource
How do you allocate resources with command?
Someone of authority dictates what happens with the resource
How do you allocate resources with majority rule?
Society votes and decides what happens with the resource
How do you allocate resources with contest
People compete and the winner gets the resource
How do you allocate resources with first come, first served?
Those who come first get the resource
How do you allocate resources with lottery
The lucky winner gets the resource
How do you allocate resources with personal characteristics?
People with certain characteristics get the resource
How do you allocate resources with force?
Resources allocated by force. Ex. War and theft
What is efficient allocation?
When we produce the goods and services that people value the most
What is individual demand?
The relationship between the quantity demanded and the price for an individual
What is the market demand
The horizontal sum of the individual demand curves
What is consumer surplus?
The excess benefit that consumers receive from a good.
The consumers expect to pay a price higher than the equilibrium so they actually get more than they expect
Where is consumer surplus on the graph?
It is the space in between the demand curve (below it) and above the equilibrium.
How is it measured?
cs= M B- price paid
Or the area under the demand curve and above the equilibrium line
What is individual supply?
The relationship between the price of a good and the quantity supplied by ONE producer
What is market supply?
The relationship between the quantity supplied and the price by ALL the producers in a market
What does the supply curve tell us?
- The minimum price that a supplier is willing to accept
2. The cost of one more unit for a good or service
What is the producer surplus?
The price received for a good minus the minimum supply price.
The firms expect to receive less than the equilibrium price, so anything above the minimum price is a surplus
How do you measure producer surplus?
ps= price received - MC
the area above the supply line and below the equilibrium line
What is “the invisible hand theory”?
Produced by Adam smith in ‘the wealth of nations’
- assumes that an economy can work well in a free market scenario where everyone works for their own self-interest
What types of market failure is there?
Overproduction and under production
What is underproduction?
A deadweight loss, a decrease in consumer surplus
What is over production?
A dead weight loss
