question
Scarce resources might be allocated by
answer
Market price
command
Majority Rule
Contest
First come first served
Lottery
Personal characteristics
Force
command
Majority Rule
Contest
First come first served
Lottery
Personal characteristics
Force
question
value
answer
=what we get
question
price
answer
=what we pay
question
marginal benefit
answer
the value of one more unit or good or service
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Individual market
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The relationship between the price of a good and the quantity demanded by one person
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Market demand
answer
The relationship between the price of a good and the quantity demanded by all buyers in the market
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Consumer surplus
answer
excess of the benefit received from a good over the amount paid for it
question
how can we calculate consumer surplus ?
answer
We can calculate consumer surplus as the marginal benefit (or value) of a good minus its price, summed over the quantity bought
(basically the area of the triangle on the graph)
(basically the area of the triangle on the graph)
question
How can we identify the consumer surplus?
answer
It is measured by the area under the demand curve and above the price paid, up to the quantity bought.
question
firms goal
answer
Maximize profit
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how do they maximize profit
answer
To make a profit, firms must sell their output for a price that exceeds the cost of production.
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For firms there is a big difference between cost and price!
answer
...
question
Cost (Firm)
answer
what the producer gives up
question
Price (firm)
answer
what the producer receives.
question
Marginal cost
answer
the minimum price that a firm is willing to accept.
question
minimum supply-price determines supply*
answer
A supply curve is a marginal cost curve
question
individual supply
answer
The relationship between the price of a good and the quantity supplied by one producer
question
market supply.
answer
The relationship between the price of a good and the quantity supplied by all producers in the market
question
Producer Surplus
answer
the excess of the amount received from the sale of a good over the cost of producing it
question
producer surplus calculated as...
answer
producer surplus is shown by the area below the market price and above the supply curve, summed over the quantity sold
(the area of the triangle beneath market price and above supply curve)
(the area of the triangle beneath market price and above supply curve)
question
What happens in equilibrium
answer
the quantity demanded equals the quantity supplied.
question
when production is less than the equilibrium quanitity
answer
Marginal Social benefit is greater than marginal social cost (MSB > MSC)
question
when production is greater than the equilibrium quanitity
answer
marginal social cost is greater than marginal social benefit (MSB < MSC)
question
when production equal to equilibrium quanity
answer
MSC=MSB
question
When the efficient quantity is produced, total surplus (the sum of consumer surplus and producer surplus) is maximized
answer
...
question
Market failure
answer
arises when a market delivers an inefficient outcome
question
Market failure can occur for 2 reasons
answer
1.Too little of an item is produced (underproduction)
2. Too much of an item is produced (overproduction
2. Too much of an item is produced (overproduction
question
-If efficient quantity= 10,000 pizzas
-and production is limited to 5000 pizzas
-this results in...
-and production is limited to 5000 pizzas
-this results in...
answer
underproduction and the quantity is inefficient
Deadweight= the decrease in total surplus = social loss
Deadweight= the decrease in total surplus = social loss
question
- if efficient quantity =10,000 pizzas
- production is expanded to 15,000
-results in ...
- production is expanded to 15,000
-results in ...
answer
overproduction
=deadweight loss
= social loss
=deadweight loss
= social loss
question
under and over production are represented very well by the graphs, if you have time look over those
answer
...
question
Under and over production can occur by...
answer
1. price and quantity regulations
2. taxes and subsidies
3. externalities
4. public and common resources
5. monopoly
6. High transactions costs
2. taxes and subsidies
3. externalities
4. public and common resources
5. monopoly
6. High transactions costs
question
1. Price and quantity regulations
answer
1. Price regulations sometimes put a block on the price adjustments and lead to underproduction
2. Quantity regulations that limit the amount that a firm is able to produce also lead to underproduction
2. Quantity regulations that limit the amount that a firm is able to produce also lead to underproduction
question
2. Taxes and subsidies
answer
Taxes increase the prices paid by buyers and lower the prices received by sellers
--So taxes decrease the quantity produced and lead to underproduction
--So taxes decrease the quantity produced and lead to underproduction
question
2 continued
answer
subsidies lower the prices paid by buyers and increase the prices received by sellers
=increase quantity produced
=overproduction
=increase quantity produced
=overproduction
question
3. Externalities
answer
Externality is a cost or benefit that affects someone other than the seller or the buyer of a good.
question
3 continued
answer
Ex: An electric utility creates an external cost by burning coal that creates acid rain.
=The utility doesn't consider this cost when it chooses the quantity of power to produce. Overproduction results
=The utility doesn't consider this cost when it chooses the quantity of power to produce. Overproduction results
question
4. Public goods and common resources
answer
A public good benefits everyone and no one can be excluded from its benefits
-It is in everyone's self-interest to avoid paying for a public good (called the free-rider problem), which leads to underproduction.
-It is in everyone's self-interest to avoid paying for a public good (called the free-rider problem), which leads to underproduction.
question
4 continued
answer
common resource is owned by no one but can be used by everyone.
- its in everyones self interest to not pay for this--> leads tragedy of the commons= overproduction
- its in everyones self interest to not pay for this--> leads tragedy of the commons= overproduction
question
4 cont
answer
this link might help further understanding http://www.dummies.com/how-to/content/ten-reallife-examples-of-the-tragedy-of-the-common.html
question
5. monopoly
answer
a firm that is the sole provider of a good or service.
- monopoly goal=max profit, does so by setting price to achieve self interests goal
=monopoly produces too little
= underproduction
- monopoly goal=max profit, does so by setting price to achieve self interests goal
=monopoly produces too little
= underproduction
question
6. High transaction costs
answer
Transactions costs are the opportunity cost of making trades in a market.
-Some markets are just too costly to operate.
-When transactions costs are high, the market might underproduce
-Some markets are just too costly to operate.
-When transactions costs are high, the market might underproduce
question
When a market is inefficient, can one of the non-market methods of allocation do a better job?
answer
Often, majority rule might be used.
question
however...
answer
. A group that pursues the self-interest of its members can become the majority.
question
also...
answer
Also, with majority rule, votes must be translated into actions by bureaucrats who have their own agendas
question
there is no one efficient mechanism
answer
But supplemented majority rule, bypassed inside firms by command systems, and occasionally using first-come, first-served, markets do an amazingly good job
question
fairness can be divided into two parts
answer
1. its not fair if the result isn't fair
2. its not fair if the rules aren't fair
2. its not fair if the rules aren't fair
question
the idea that only one equality brings efficiency =
answer
Utilitarianism
question
Utilitarianism
answer
Utilitarianism is the principle that states that we should strive to achieve "the greatest happiness for the greatest number."
question
fact: Only when income is equally distributed has the greatest happiness been achieved.
Check figure 5.7
Check figure 5.7
answer
...
question
Utilitarianism ignores the cost of making income transfers
answer
Recognizing these costs leads to the big tradeoff between efficiency and fairness.
question
therefore symmetry principle was created
answer
symmetry principle is the requirement that people in similar situations be treated similarly.
question
this principle means equality of opportunity, not equality of income.
answer
...
question
Robert Nozick suggested that fairness is based on two rules
answer
...
question
1st rule
answer
The state must create and enforce laws that establish and protect private property.
question
2nd rule
answer
Private property may be transferred from one person to another only by voluntary exchange.
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