Resource Allocation Methods:

• market prices
• commands
• majority rule
• contest
• first-come,first-serve
• sharing equally
• lottery
• personal characteristics
• force

Resource Allocation Methods:

Market Price:

Resource Allocation Methods:

Command:

Resource Allocation Methods:

Majority Rule:

Resource Allocation Methods:

Contests:

Resource Allocation Methods:

First-Come, First-Serve

Resource Allocation Methods:

Sharing Equally:

Resource Allocation Methods:

Lottery:

Resource Allocation Methods:

Personal Characteristics:

Resource Allocation Methods:

Force:

Demand and Marginal Benefit:

Demand, Willingness to pay, and Value:

• value is what we get, while price is what we pay
• marginal benefit is measured as the maximum price that a person is willing to pay for another unit of a g/s
• but willingness to pay determines demand
• a Demand Curve is a Marginal Benefit Curve

Demand and Marginal Benefit:

Individual Demand:

Demand and Marginal Benefit:

Market Demand:

the relationship between the price of a good and the quantity demanded by all of the buyers in the market

the market demand curve is the horizontal sum of the individual demand curves

Demand and Marginal Benefit:

Consumer Surplus:

the Maximum amount a consumer would be willing to pay for a good minus the actual price payed for it, summed over the quantity bought

measured on a graph as the area under the demand curve and above the price paid up to the quantity bought

Supply and Marginal Cost:

Supply, Cost, and Minimum Supply-Price:

• cost is what the producer gives up, price is what the producer receives
• marginal cost is the minimum price producers must receive to produce one more unit of a g/s
• but the minimum supply-price determines supply
• a Supply Curve is a Marginal Cost Curve

Supply and Marginal Cost:

Individual Supply:

Supply and Marginal Cost:

Market Supply:

the relationship between the price of a good and the quantity supplied by all of the producers in the market

the market supply curve is the horizontal sum of the individual supply curves

Supply and Marginal Cost:

Producer Surplus:

the difference between the price a producer receives for a good and the opportunity cost of producing it, summed over the quantity sold

measured on a graph as: the area below the market price and above the supply curvem summed over the quantity sold

Is the Competitive Market Efficient?

At the Equillibrium Quantity....?

• at the equillibrium quantity, marginal benefit equals marginal cost, so the quantity is the efficient quantity
• when the efficient quantity is produced, total surplus (sum of producer surplus and consumer surplus) is maximized

Is the Competitive Market Efficient?

The Invisible Hand:

Is the Competitive Market Efficient?

Overproduction and Underproduction:

Is the Competitive Market Efficient?

Underproduction:

if production is restricted, there is an underproduction and the quantity is inefficient

this is a social loss

Is the Competitive Market Efficient?

Deadweight loss

the decrease in consumer surplus and producer surplus (total surplus) that results from producing an inefficient quantity of a good

is a loss of surplus to society

Is the Competitive Market Efficient?

Overproduction

if production is expanded, a deadweight loss arises from overproduction

this is a social loss

Is the Competitive Market Efficient?

Obstacles to Efficiency:

• price and quantity regulations
• taxes and subsidies
• externalities
• public goods and common resources
• monopoly
• high transaction costs

Is the Competitive Market Fair?

Two Idea Groups:

• It's not fair if the result isn't fair.
• it's not fair if the rules aren't fair.

Is the Competitive Market Efficient?

Utilitarianism:

the idea that only equality brings efficiency

utilitarianism is the principle that states that we should strive to achieve "the greatest happiness for the greatest number"

[ignores the cost of making income transfers]

Is the Competitive Market Efficient?

It's not fair if the result isn't fair:

[sample]

• if everyone gets the same marginal utility from a given amount of income, and 
• if the marginal benefit of income decreases as income increases,
• then taking a dollar from a richer person and giving it to a poorer person increases the total benefit
• only when income is equally distributed has the greatest happiness been achieved

Is the Competitive Market Efficient?

it's not fair if the rules aren't fair:

idea is based on the symmetry principle

Is the Competitive Market Efficient?

Symmetry Principle:

the requirement that people in similiar situations be treated similiarly

in economics, it means equality of opportunity, not equality of income

consumer surplus measures the net benefit to consumers from participating in a market, rather than the total benefit

for the market, consumer surplus is equal to the total benefit received from consumers minus the total amount they must pay to buy the good

producer surplus measures the net benefit received by producers from participating in the market

for the market, producer surplus is equal to the total amount firms receive from consumers minus the cost of producing the good