ECON 101 - Chp 5

Question 1

What are the 8 alternative methods of allocating scarce resources?

Answer 1

1. market price
2. command
3. majority rule
4. contest
5. first-come, first-served
6. lottery
7. personal characteristics
8. Force

Question 2

How does the market price allocate scarce resources?

Answer 2

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

Question 3

how does the command allocate resources

Answer 3

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.

Question 4

how does majority rules allocate scarce resources

Answer 4

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.

Question 5

how does contest allocate scarce resources?

Answer 5

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.

Question 6

How does the method of “first-come, first serve” allocate scarce resourecs

Answer 6

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

Question 7

how does the method of “lottery” allocate scarce resources?

Answer 7

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

Question 8

how does the method of “personal characteristics” allocate scarce resources?

Answer 8

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

Question 9

How does “force” allocate scarce resources?

Answer 9

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.

Question 10

when are resources considered allocated in social interest

Answer 10

when resources are used in teh ways that people value most highly

Question 11

value vs price in econ

Answer 11

value is what we get

price is what we pay

Question 12

what’s the relationship between value and marginal benefit

Answer 12

the values of 1 more unit of a good or service is its marginal benefit

Question 13

how does the demand curve and marginal benefit relate?

Answer 13

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.

Question 14

individual demand vs market demand

Answer 14

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

Question 15

what’s the market demand curve

Answer 15

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

Question 16

define consumer surplus

Answer 16

the excess of the bemefit received from a good over the amount paid for it

Question 17

how to calculate the consumer surplus

Answer 17

marginal benefit/value of a good minus its price, summed over the quantity bought

Question 18

all goods + services have ________ marginal benefit, so people receive more benefit of their consumption than the amount they pay

Answer 18

Decreasing

Question 19

how do firms make a profit?

Answer 19

firms have to make a profit by selling their output for a price that exceeds the cost of production

Question 20

cost vs price in terms of producers

Answer 20

cost = what firms give up when it produces a good or service

price = what a firm receives when it sells the good or service

Question 21

define marginal cost in terms of the supply side

Answer 21

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

Question 22

how is supply curve the marginal cost curve?

Answer 22

minimum supply-price determines supply.

Question 23

individual supply vs market supply

Answer 23

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

Question 24

What’s the market supply curve

Answer 24

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

Question 25

define producer surplus and how to calculate

Answer 25

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

Question 26

when does the equilibrium in a competitive market occur?

Answer 26

occurs when quantity demanded = quantity supplied (at intersection of the demand curve and the supply curve, aka the marginal social benefit = marginal social cost)

Question 27

define total surplus

Answer 27

the sum of the consumer and producer surplus

Question 28

when is total surplus maximized? what does this mean in terms of buyers and sellers?

Answer 28

when the efficient quantity is produced - means that buyers and sellers acting in their self-interest end up promoting the social interest

Question 29

define market failure

Answer 29

when a market is inefficient - either the overproduction or underproduction of a good or service.

Question 30

how do we measure the scale of inefficiency

Answer 30

deadweight loss - the decrease in total surplus that results from an inefficient level of production

Question 31

What are the sources of market failure?

Answer 31

1. price + quantity regulation
2. taxes + subsidies
3. externalities
4. public goods + common resources
5. monopoly
6. high transaction costs

Question 32

how does price + quantity regulation lead to market failure?

and define the 2 terms

Answer 32

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

Question 33

How do taxes + subsidies brign market failure

Answer 33

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

Question 34

how does an externality cause market failure?

please define the term

Answer 34

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

Question 35

How do public goods + common resources lead ot market failure?

please define the terms

Answer 35

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

Question 36

How would a monopoly lead to market failure?

please define the term

Answer 36

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

Question 37

How do high transaction costs lead ot market failure?

please define the term

Answer 37

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.

Question 38

define utilitarianism in econ

Answer 38

principle that states that we should strive to achieve the “greatest happinese fo the greatrest number”

Question 39

what’s the con of ultitarianism?

Answer 39

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

Question 40

define the symmetry principle

Answer 40

the requirement that people in similar situatino be treated similarly - a moral principle

Question 41

what 2 rules should fairness follow?

Answer 41

1. the state must enforce laws that establish and protect prviate proerty
2. private property may be transferred from 1 person to another only voluntary exchange

Question 42

define price gouging

Answer 42

the practice of offering to sell an essential item following a natural disaster at a price much higehr than its normal price

Question 43

what are the 2 big apporaches to thinking about fairness?

Answer 43

1. fairness in the results
2. fairness in the rules

Question 44

what do fair-results ideas require?

Answer 44

income transfers from the rich to the poor

Question 45

what do fair-rules ideas require?

Answer 45

property rights + voluntary exchange