ECON 101 - Chp 5 Flashcards
What are the 8 alternative methods of allocating scarce resources?
- market price
- command
- majority rule
- contest
- first-come, first-served
- lottery
- personal characteristics
- Force
How does the market price allocate scarce resources?
when a market price allocates a scarce resource, the people who are willing + able to pay that price to get the resource
2 types of people decide not to pay the market price - those who can afford to pay but choose not to and those who are too poor and simply can’t afford to buy
sometimes poor people cannot afford necessities, so this is not the best way to allocate resources
how does the command allocate resources
command system allocates resources by the order of someone in authority - your labour is allocated to specific tasks by a command
command system works well in organization in which lines of authority and responsibility are clear + it’s easy to monitor the activities being performed
command system works badly when the range of activities to be monitored is large and when it’s easy for people to fool those in authority.
how does majority rules allocate scarce resources
majority of voters choose
works well when the decisions being made affect large numbers of people and self-interest must be suppressed to use resources most effectively.
how does contest allocate scarce resources?
allocates resources to a winner
work well when the efforts of the “players” are hard to monitor and reward directly. only a few people end up with the prize but lots of people work harder in the process of trying to won
the total output produced by the workers is much greater than it would be without the contest.
How does the method of “first-come, first serve” allocate scarce resourecs
allocates to those who are first in line.
works best when a scarce resource can serve just one user at a time in a sequence - this method minimizes the time sent waiting for the resource to become free
how does the method of “lottery” allocate scarce resources?
lotteries allocate resources to those who pick the winning number
lotteries work best when there is no effective way to distinguish potential users of a resource
how does the method of “personal characteristics” allocate scarce resources?
when resources are allocated on the basis of personal characteristic, people with the “right” characteristics get the resources - some of the resources that matter most to you are allocated in this way, e.g romantic partner
this method can be used in unacceptable ways - racism, discrimination
How does “force” allocate scarce resources?
The use of military force plays an enormous role in allocating resources.
theft, taking the property of others without their consent, allocate billions of dollars worth of resources annually
plays a positive role in providing the state with an effective method of transferring wealth from the rich to the poor and provides the legal framework in which voluntary exchange in markets takes place.
force is need to uphold the law.
when are resources considered allocated in social interest
when resources are used in teh ways that people value most highly
value vs price in econ
value is what we get
price is what we pay
what’s the relationship between value and marginal benefit
the values of 1 more unit of a good or service is its marginal benefit
how does the demand curve and marginal benefit relate?
we measure marginal benefit by the maximum price that is willingly paid for another unit of the good or services and willingness to pay determines demand
thus the demand curve is a marginal benefit curve.
individual demand vs 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 a good and the quantity demanded by all buyers
what’s the market demand curve
the horizontal sum of the individual demand curves and is formed by adding the quantities demanded by all the individuals at each price
it’s also called the marginal benefit curve or the marginal social benefit
define consumer surplus
the excess of the bemefit received from a good over the amount paid for it
how to calculate the consumer surplus
marginal benefit/value of a good minus its price, summed over the quantity bought
all goods + services have ________ marginal benefit, so people receive more benefit of their consumption than the amount they pay
Decreasing
how do firms make a profit?
firms have to make a profit by selling their output for a price that exceeds the cost of production
cost vs price in terms of producers
cost = what firms give up when it produces a good or service
price = what a firm receives when it sells the good or service
define marginal cost in terms of the supply side
the minimum price that producers must receive to induce them to offer one more unit of a good or service for sale.
marginal cost = cost of producing 1 more unit of a good or services is its marginal cost
how is supply curve the marginal cost curve?
minimum supply-price determines supply.
individual supply vs market supply
individual supply = relationship between the price of a good and the quantity supplied by one producer
market supply = relationship between the price of a good and the quantity supplied by all producers
What’s the market supply curve
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
also known as marginal cost curve, or its also known as marginal social cost
define producer surplus and how to calculate
the excess of the amount received from the sale of a good or service over the cost of producing it
producer surplus = price received minus the marginal cost (minimum supply price), summed over the quantity sold
when does the equilibrium in a competitive market occur?
occurs when quantity demanded = quantity supplied (at intersection of the demand curve and the supply curve, aka the marginal social benefit = marginal social cost)
define total surplus
the sum of the consumer and producer surplus
when is total surplus maximized? what does this mean in terms of buyers and sellers?
when the efficient quantity is produced - means that buyers and sellers acting in their self-interest end up promoting the social interest
define market failure
when a market is inefficient - either the overproduction or underproduction of a good or service.
how do we measure the scale of inefficiency
deadweight loss - the decrease in total surplus that results from an inefficient level of production
What are the sources of market failure?
- price + quantity regulation
- taxes + subsidies
- externalities
- public goods + common resources
- monopoly
- high transaction costs
how does price + quantity regulation lead to market failure?
and define the 2 terms
a price regulation blocks the price adjustments that balance the quantity demanded/supplied and lead to underproduction.
quantity regulation limits the amount that a farm/firm is permitted to produce –> underproduction
a price regulator can act as a price floor or price cap
How do taxes + subsidies brign market failure
taxes increases the prices paid by buyers, lower the prices received by sellers –> underproduction
subsidies decreases prices paid by buyers, increase prices received by sellers –> overproduction
subsidies are payments made by the governemnt to producers
how does an externality cause market failure?
please define the term
externality is a cost or benefit that affects a 3rd party other than the buyer and seller
external costs lead to overproduction
external benefits lead to underproduction
How do public goods + common resources lead ot market failure?
please define the terms
public good = good or services from which everyone benefits and no one can be excluded –> competitive market would underproduce a public good as people would try to free ride on everyone else
common resource is owned by no one but is available to be used by everyone –> leads to overproduction as it’s in everyone’s self-interest to ignore the costs they impose on others when they decide how much of a common resource to use
How would a monopoly lead to market failure?
please define the term
monopoly = a firm that is the sole provider of a good or service
monopoly’s self-interest to maximize profit + due to no competitors, a monopoly produces too little and charges too high a price–> leads to underproduction
How do high transaction costs lead ot market failure?
please define the term
transaction costs = costs to the services that enable a market to bring buyers + sellers together
it’s costly to operate any market but some markets are so costly that they simpe don’t
when transaction costs are high, the market might underproduce.
define utilitarianism in econ
principle that states that we should strive to achieve the “greatest happinese fo the greatrest number”
what’s the con of ultitarianism?
ignores the costs of making income transfers –> a tradeoff of efficinecy + fairness
taxing higher on people’s income makes them want to work less leading to smaller quantities of goods + services being produced.
2nd con = inefficiney, a dollar taken from the rich doesn’t end up as a dollar for the poorer person
define the symmetry principle
the requirement that people in similar situatino be treated similarly - a moral principle
what 2 rules should fairness follow?
- the state must enforce laws that establish and protect prviate proerty
- private property may be transferred from 1 person to another only voluntary exchange
define price gouging
the practice of offering to sell an essential item following a natural disaster at a price much higehr than its normal price
what are the 2 big apporaches to thinking about fairness?
- fairness in the results
- fairness in the rules
what do fair-results ideas require?
income transfers from the rich to the poor
what do fair-rules ideas require?
property rights + voluntary exchange
