chap 5

Question 1

What is a Command system in resource allocation

Answer 1

allocates resources by the order (command) of someone in authority.
For example, if you have a job, most likely someone tells you what to do. Your labor time is allocated to specific tasks by command.
A command system works well in organizations with clear lines of authority but badly in an entire economy

Question 2

Majority Rule in resource allocation

Answer 2

allocates resources in the way the majority of voters choose.
Societies use majority rule for some of their biggest decisions.

Question 3

Contest in resource allocation

Answer 3

allocates resources to a winner (or group of winners).
The most obvious contests are sporting events but they occur in other arenas:
ex oscars

Question 4

First-Come, First-Served in resource allocation

Answer 4

allocates resources to those who are first in line.
Casual restaurants use first-come, first served to allocate tables. Supermarkets also uses first-come, first-served at checkout.

Question 5

Lottery in resource allocation

Answer 5

allocate resources to those with the winning number, who draw the lucky cards, or who come up lucky on some other gaming system.
State lotteries and casinos reallocate millions of dollars worth of goods and services each year.

Question 6

Personal Characteristics in resource allocation

Answer 6

allocate resources to those with the “right” characteristics.
For example, people choose marriage partners on the basis of personal characteristics.

Question 7

Force in resource allocation

Answer 7

For example, war has played an enormous role historically in allocating resources.
Theft, taking property of others without their consent, also plays a large role.
But force provides an effective way of allocating resources—for the state to transfer wealth from the rich to the poor and establish the legal framework in which voluntary exchange can take place in markets.

Question 8

Value vs price

Answer 8

Value is what we get, price is what we pay.

Question 9

Marginal benefit

Answer 9

The value of one more unit of a good or service is its marginal benefit.

Question 10

willingness to pay

Answer 10

willingness to pay determines demand.

Question 11

Marginal benefit curve

Answer 11

demand curve

Question 12

individual demand.

Answer 12

The relationship between the price of a good and the quantity demanded by one person is called individual demand.

Question 13

market demand

Answer 13

The relationship between the price of a good and the quantity demanded by all buyers in the market is called market demand.

Question 14

Consumer surplus

Answer 14

the excess of the benefit received from a good over the amount paid for it.

Question 15

Calculating consumer surplus

Answer 15

marginal benefit (or value) of a good minus its price, summed over the quantity bought. (measured by the area under the demand curve and above the price paid, up to the quantity bought.)

Question 16

cost vs price

Answer 16

Cost is what the producer gives up, price is what the producer receives.

Question 17

Marginal cost

Answer 17

The cost of one more unit of a good or service is its marginal cost.
Marginal cost is the minimum price that a firm is willing to accept

Question 18

marginal cost curve is…

Answer 18

supply curve

Question 19

market supply.

Answer 19

The relationship between the price of a good and the quantity supplied by all producers in the market is called market supply.

Question 20

Individual supply

Answer 20

The relationship between the price of a good and the quantity supplied by one producer is called individual supply.

Question 21

Producer surplus

Answer 21

the excess of the amount received from the sale of a good over the cost of producing it.

Question 22

Calculating producer surplus

Answer 22

price received for a good minus the minimum-supply price (marginal cost), summed over the quantity sold.

Question 23

efficient allocation of resources at equilibrium

Answer 23

quantity demanded equals the quantity supplied.

Question 24

When production is …
less than the equilibrium quantity

Answer 24

marginal social benefit is smaller then marginal social cost

Question 25

When production is … more than the equilibrium quantity

Answer 25

marginal social benefit is larger then marginal social cost

Question 26

when production is equal to the equilibrium quantity

Answer 26

marginal social benefit = marginal social cost

Question 27

When the efficient quantity is produced,

Answer 27

total surplus is maximized

Question 28

The Invisible Hand

Answer 28

Adam Smith’s “invisible hand” idea in the Wealth of Nations implied that competitive markets send resources to their highest valued use in society. Consumers and producers pursue their own self-interest and interact in markets. Market transactions generate an efficient—highest valued—use of resources.

Question 29

Market failure

Answer 29

arises when a market delivers an inefficient outcome. Market failure can occur because Too little of an item is produced (underproduction) or Too much of an item is produced (overproduction).

Question 30

deadweight loss

Answer 30

equals the decrease in total surplus. can arise from over or underproduction

Question 31

Sources of Market Failure

Answer 31

In competitive markets, underproduction or overproduction arise when there are Price and quantity regulations Taxes and subsidies Externalities Public goods and common resources Monopoly High transactions costs

Question 32

Price and Quantity Regulations

Answer 32

Price regulations sometimes put a block on the price adjustments and lead to underproduction. Quantity regulations that limit the amount that a farm is permitted to produce also lead to underproduction.

Question 33

Taxes and Subsidies

Answer 33

Taxes increase the prices paid by buyers and lower the prices received by sellers. So taxes decrease the quantity produced and lead to underproduction. Subsidies lower the prices paid by buyers and increase the prices received by sellers. So subsidies increase the quantity produced and lead to overproduction.

Question 34

Externalities

Answer 34

An externality is a cost or benefit that affects someone other than the seller or the buyer of a good. An electric utility creates an external cost by burning coal that creates acid rain. The utility doesn’t consider this cost when it chooses the quantity of power to produce. Overproduction results.

Question 35

Public Goods and Common Resources

Answer 35

A public good benefits everyone and no one can be excluded from its benefits. It is in everyone’s self-interest to avoid paying for a public good (called the free-rider problem), which leads to underproduction.

Question 36

Monopoly

Answer 36

a firm that is the sole provider of a good or service. The self-interest of a monopoly is to maximize its profit. To do so, a monopoly sets a price to achieve its self-interested goal. As a result, a monopoly produces too little and underproduction results.

Question 37

High Transactions Costs

Answer 37

Transactions costs are the opportunity cost of making trades in a market. To use the market price as the allocator of scarce resources, it must be worth bearing the opportunity cost of establishing a market. Some markets are just too costly to operate. When transactions costs are high, the market might underproduce.

Question 38

Alternatives to the Market

Answer 38

When a market is inefficient, can one of the non-market methods of allocation do a better job?

Question 39

Ideas about fairness can be divided into two groups:

Answer 39

It’s not fair if the result isn’t fair. It’s not fair if the rules aren’t fair.

Question 40

Utilitarianism

Answer 40

The idea that only equality brings efficiency is called utilitarianism. Utilitarianism is the principle that states that we should strive to achieve “the greatest happiness for the greatest number.”

Question 41

symmetry principle

Answer 41

The idea that “it’s not fair if the rules aren’t fair” is based on the symmetry principle. The symmetry principle is the requirement that people in similar situations be treated similarly.

Question 42

Robert Nozick suggested that fairness is based on two rules:

Answer 42

The state must create and enforce laws that establish and protect private property. Private property may be transferred from one person to another only by voluntary exchange. This means that if resources are allocated efficiently, they may also be allocated fairly.