Chapter 5

# Chapter 5 - Econ 101 Micro Economics Chapter 5 Efciency and...

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Chapter 5: Efficiency and Equity Resource Allocation Methods Resources are scarce so they must be allocated by: 1. Market Price: when market price allocated scarce resource, people who are willing and able to pay the price get the resource. Two kinds of people decide not to pay market price: i) Those who can afford to buy, but choose not to ii) Those who can ʼ t afford to buy 2. Command System : allocated resources by the order (command) of someone in authority Used inside firms and government departments Used badly in North Korea who supply of food is given based on command system 3. Majority Rule: allocates resources in the way that majority of voters choose The majority rule in representative governments that (we) vote for decide tax rates 4.Contest: allocates resources to a winner (or group of winners) Tiger Woods wins golf contest, so he gets the biggest pay off (sports) Big Gates won contest to provide world ʼ s personal computer operating system in a contest, all players try to win the prize so total output produced by workers is greater than it would be with out the contest 5. First-Come, First-Served : allocates resources to those who are first in line 6. Lottery : allocates resources to those who come up luck in some gaming system 7. Personal Characteristics : allocates resources based on people with the “right” characteristics 8. Force: allocated resources for both good/ill Ill: the use of military force in war by one nation to another Good: Legal system forcing contracts and laws Demand and Marginal Benefit Resources are allocated efficiently when MB=MC. Consumers distinguish between value and price How market demand reflects marginal benefit: 1. Demand, Willingness to pay and Value: the value of one more unit of a good or service is MB, measured by max price one is willing to pay for another unit Demand curve = marginal benefit curve 2. Individual Demand and Market Demand Individual Demand: the relationship between the price of a good and the quantity demanded by one person Market Demand: relationship between the price of a good and the quantity demanded by all buyers Econ 101: Micro Economics

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At 1\$ a slice, QD by Lisa is 30 slices and QD by Nick is 10 slices (the only buyers) The market demand curve: the horizontal sum of the individual demand curves
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