ch5 - Efficiency and Equity Resource Allocation Methods...

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1 Chapter 5 Efficiency and Equity Resource Allocation Methods Resources must be allocated in some method Resources can be allocated by Market price Command Majority rule Contest First-come, first-served Lottery Personal characteristics Force Demand and Marginal Benefit The value of one more unit of a good or service is its marginal benefit. Marginal benefit can be expressed as the maximum price that people are willing to pay for another unit of the good or service. A demand curve is a marginal benefit curve. A demand curve below shows the quantity demanded at each price. And a demand curve below also shows the maximum price consumers are willing to pay for one more unit of the good or service. The market demand curve is the horizontal sum of the individual demand curves. We find the points on the market demand curve by adding together the quantities demanded by all individuals at each price. Consumer surplus is the value of a good minus the price paid for it, summed over the quantity bought. When people buy something for less than it is worth to them, they receive a consumer surplus.
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Here the consumer surplus is the green triangle. The area of this triangle is (20 x $1)/2 = $10. Supply and Marginal Cost Cost is what a producer gives up, and price is what a producer receives. Marginal cost is the minimum price that producers must receive to induce them to produce another unit of the good or service. The supply curve is a marginal cost curve.
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This note was uploaded on 06/30/2009 for the course ECON 1020 taught by Professor Parkin during the Spring '09 term at UWO.

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ch5 - Efficiency and Equity Resource Allocation Methods...

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