Chapter 5

• Resource allocation methods


  • Market price
  • Command
  • Majority rules
  • Contest
  • First-come, first-served
  • Equally
  • Lottery
  • Personal characteristics
  • Force
• Market price


  Allocates a scarce resource to those who are willing to pay the market price
• Command system


  Allocates resources by the order (command) of someone in authority
• Majority rule


  Allocates resources in the way that a majority of voters choose
• Contest


  Allocates resources to a winner (or a group of winners)
• First-come, first-served


  Allocates resources to those who are first in the queue
• Equally


  Shares a resource equally, everyone gets the same amount
• Lottery


  Allocates resources to those who pick the winning number, draw the lucky card or pick the winning ticket
• Personal characteristics


  Allocates resources based on personal characteristics, people with the 'right' characteristics get the resources
• Force


  Plays a crucial role in allocating resources, e.g. war, theft
• Consumer surplus


  The excess of the benefit received from a good over the amount paid for it
• Demand and marginal benefit

  Resources are allocated efficiently and in the social interest when they are used in the ways that people value most highly
• Value


  What we get, price is what we pay
• Marginal benefit


  The maximum price willingly paid
• Individual demand


  The relation between the price of a good and the quantity demanded by one person
• Market demand


  The relationship between the price of a good and the quantity demanded by all buyers in the market
• Cost


  What the producer gives up, price is what the producer receives
• Marginal cost


  The minimum price that a firm is willing to accept
• Individual supply


  The relationship between the price of a good and the quantity supplied by one producer
• Market supply


  The relationship between the price of a good and the quantity supplied by all producers in the market
• Producer supply


  The excess of the amount received from the sale of a good or service over the cost of producing it
• Equilibrium in a competitive market occurs when the quantity demanded equals the quantity supplied at the intersection of the demand curve and the supply curve
• At the equilibrium point, marginal social benefit on the demand curve equals marginal social cost on the supply curve, which is the condition for allocative efficiency
• If the quantity is less than the equilibrium quantity, the marginal product is valued more highly than it costs to produce
• If the quantity is greater than the equilibrium quantity, it costs more to produce the marginal product than the value people place on it
• Total surplus


  The sum of consumer surplus and producer surplus
• Invisible hand


  Adam Smith's idea that competitive markets send resources to their highest valued use in society
• Market failure


  A situation in which a market delivers an inefficient outcome
• Underproduction occurs when too little of a good or service is produced, resulting in a deadweight loss
• Overproduction occurs when too much of a good or service is produced, resulting in a deadweight loss