Econ Study Guide - Econ Study Guide Chapter 6 Efficiency...

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Econ Study Guide Chapter 6 Efficiency and Fairness of Markets 1) Allocation Methods and Efficiency Resource Allocation Methods (Know what each is) Market Price Command Majority Rule Contest First come, First serve Sharing equally Lottery Personal Characteristics Force Allocative Efficiency – A situation in which the quantity of goods and services produced are those that people value most highly . It is not possible to produce more of a good or service without giving up some of another good that people value more highly. Or, when the marginal costs of production = the marginal benefits o Marginal Benefit- benefit received from consuming one more unit of a product o Marginal Cost- opportunity cost of producing one more unit of a product Measured by slope of PPF 2) Value, Price, and Consumer Surplus Value = marginal benefit
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o Marginal Benefit Curve (MB) = Demand Curve (D) Consumer Surplus = marginal benefit from a good or service minus price paid for it, summed over quantity consumed Consumer Surplus = Total Benefit – Amount Paid 3) Cost, Price, and Producer Surplus Cost = marginal cost o Marginal Cost Curve (MC) = Supply Curve (S) Producer Surplus = the price of a good minus the marginal cost of producing it, summed over the quantity produced Producer Surplus = amount received minus total cost 4) Are Markets Efficient? Yes, if Marginal Benefit = Marginal Cost Total Surplus, or producer surplus + consumer surplus, is maximized Deadweight Loss- the decrease in total surplus resulting from inefficient over/underproduction Obstacles to Efficiency Price and Quantity regulations Taxes and Subsidies Externalities Public Goods and Common Resources Monopoly High Transaction Costs 5) Are Markets Fair? Approaches It’s not fair if the rules aren’t fair
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o Require private property rights and voluntary exchange It’s not fair if the results aren’t fair o Require income transfer from the rich to the poor Big Tradeoff- tradeoff between efficiency and fairness
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This note was uploaded on 05/02/2011 for the course BUSINESS 100 taught by Professor Betker during the Spring '08 term at Saint Louis.

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Econ Study Guide - Econ Study Guide Chapter 6 Efficiency...

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