Lecture+02+Slides

Lecture+02+Slides - Scarcity, Efciency, and Allocation EEP...

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Scarcity, EfFciency, and Allocation EEP 145 Professor Michael Anderson U.C. Berkeley Dept. of Agricultural and Resource Economics
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Economics studies the efFcient allocation of scarce resources (goods) Scarcity A good is something that can affect the well-being (utility) of one or more individuals A good is scarce if the quantity demanded at zero price is greater than the quantity supplied Examples of scarce goods: - iPhones - parking spaces in San ±rancisco - California coast line - enrollment slots in many Cal courses!
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But not all goods are scarce! Scarcity Examples of non-scarce goods: - raw sewage - page views at nytimes.com (maybe not now!) - land in West Texas - Rebecca Black video - free or open source software - enrollment slots in this course in October? Question: Why are these things goods?
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Prices are a mechanism for allocating goods in an efFcient manner Scarcity With perfect competition, the price of a non-scarce good should be zero What happens when we set the price of a scarce good at zero? Rationing Think of queues in the old Soviet Union Or lines for the next iPhone or at a popular restaurant! Queues are very inefFcient mechanism for allocating scarce goods – we will go through an example later.
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There are many ways to defne eFfciency EfFciency Economists oFten use the term “eFfcient” What do we mean by that? Many possible ways to defne eFfciency - Output per unit oF energy (engineering) - Output per worker (human resources) - Output per hour (line manager) The economist’s defnition is somewhat diFFerent Basically: Things are “eFfcient” when there is no Free way to make anyone better oFF
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A “Pareto improving” trade is one that makes at least one person better off without making anyone else worse off Pareto Improving Trade Suppose I have 5 Xbox 360s and you have one iPhone I don’t have time to play games at the moment You are locked into a contract on Verizon Sprint We engage in a Pareto-improving trade by swapping my Xboxes for your iPhone Both of us are better off No one else is worse off But what if only one of us had been better off?
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An allocation of goods is “Pareto efFcient” if it is impossible to make someone better off without making someone else worse off Pareto EfFciency ±or a given set of goods there are many Pareto efFcient allocations Suppose the classroom is an economy
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Lecture+02+Slides - Scarcity, Efciency, and Allocation EEP...

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