Chapter 5 - Chapter 5 Efficiency and Equity I Resource...

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Chapter 5: Efficiency and Equity I. Resource Allocation Methods A. Market Price A.1. People who are willing and able to pay price get resource A.2. Two kinds choose not to pay: Those who can afford to pay buy choose not to buy and those who are too poor and simply can’t afford to buy B. Command: Command system -allocates resources by order of someone in authority, easy to monitor activities C. Majority rule: majority of voters choose D. Contest: allocates resources to a winner D.1. Only a few people end up with big prize but many people work harder in process of trying to win E. First-Come, First-Served: allocates resources to hose who are first in line E.1. By serving user who arrives first, method is minimizes the time spent waiting for the resources to become free F. Lottery: allocates resources to those who pick the winning number, draw lucky card or come up lucky on some other gaming system G. Personal Characteristics: people with “right” characteristics get resources H. Force: plays crucial role, for both good and ill in allocating scarce resources H.1. Ill H.2. Good provides state with effective method of transferring wealth from rich to poor, and provides legal framework in which voluntary exchange in markets takes place H.3. Essential to uphold principle of the rule of law II. Demand and Marginal Benefit A. Resources are allocated efficiently when they are used in ways that people value most highly B. Marginal benefit (MB) equals marginal cost (MC); MB=MC C. Demand, Willingness to Pay, and Value C.1. Value of one more unit of good or service is its marginal benefit C.2. Measure MB by maximum price that is willingly paid for another unit of good C.3. Determines demand C.4. Demand curve is marginal benefit curve
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D. Individual Demand and Market Demand D.1. Individual demand-relationship between price of good and quantity demanded by one person D.2. Market demand-relationship between price of good and quantity demanded by all buyers D.3. Market demand curve is horizontal sum of individual demand curves and is formed by adding quantities demanded by all individuals at each price
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This note was uploaded on 11/14/2011 for the course ECO 201 taught by Professor Dunlevy during the Fall '08 term at Miami University.

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Chapter 5 - Chapter 5 Efficiency and Equity I Resource...

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