Ch05-Lecture+Notes - Resource Allocation Methods Well study...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Resource Allocation Methods We’ll study market (or market price mechanism). How market price functions as a signal of scarcity or abundance How and under what circumstances market helps to allocate resources efficiently How and under what circumstances market may result in an undesirable outcome What other allocation methods can be used to augment market mechanism [ ] Benefit, Cost, and Surplus Demand = Willingness to Pay = Marginal Benefit: The three statements below have the same meaning. “The quantity of pizza demanded at the price of $1.00/slice is 30 slices.” “The consumer is willing to pay $1.00 for the 30 th slice.” “The consumer’s marginal benefit from the 30 th slice is $1.00.” Market demand is the sum of individual demands. Graphically, you get the market demand curve by horizontally adding all individual demand curves. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. Use the words correctly: Always specify the price, or the quantity, at which consumer surplus is calculated. For example, to compute an individual’s consumer surplus at 30 slices of pizza, First note the price at which 30 slices are demanded, say $1.00. Next, compute the difference between what consumer is willing to pay for the 1 st slice and $1.00. Then compute the difference between what consumer is willing to pay for the 2 nd slice and $1.00. : : Then compute the difference between what consumer is willing to pay for the 29 th slice and $1.00. Then compute the difference between what consumer is willing to pay for the 30 th slice and $1.00 (this is 0!).
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Finally, sum all the differences you have computed. That sum is the consumer surplus at 30 slices. Graphically, consumer surplus is, approximately , the area below the demand curve and above horizontal line at the price $1.00: When the good is measured in small enough units, this is a good approximation. [ ] Supply = Willingness to Sell = Marginal Cost:
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern