Chapter 5

Question 1

How are scarce resources allocated by?

Answer 1

 Market price
 Command
 Majority rule
 Contest
 First-come, first-served
 Sharing equally
 Lottery
 Personal characteristics
 Force

Question 2

When a market allocates a scarce resource..

Answer 2

..the people who get the resource are those who are

willing to pay the market price

Question 3

How does a command system allocate resources?

Answer 3

By the order (command) of someone in authority. ex. A boss at your job tells you what to do.

Question 4

How does a majority system allocate resources?

Answer 4

In the way the majority of voters choose. ex. taxes etc.

Question 5

How does a contest allocate resources?

Answer 5

To a winner or group of winners. ex. sporting events, oscars, etc.

Question 6

How does first come-first serve allocate resources?

Answer 6

To those first in line. ex. restaurants, queues, etc.

Question 7

How does a lottery allocate resources?

Answer 7

To those with the winning number, draw the lucky cards, or come up lucky on some other gaming system. ex. lottery/gaming

Question 8

How do personal characteristics allocate resources?

Answer 8

To those with the “right” characteristics. ex. relationships/marriage.

Question 9

How does force allocate resources?

Answer 9

To take with aggression either physically. ex. war

Question 10

What is value? What is price?

Answer 10

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

Question 11

What is marginal benefit?

Answer 11

The value of one more unit of a g/s.

Question 12

How is value measured?

Answer 12

The maximum price someone is willing to pay.

Question 13

What is the demand curve?

Answer 13

Marginal benefit curve.

Question 14

What is individual demand? Market demand?

Answer 14

Relationship between price and demand of a good for a single person. Relationship between price and demand of a good for all buyers in the market.

Question 15

What is a consumer surplus? Producer surplus?

Answer 15

The excess of a benefit received from a good over the amount paid for it. The excess of the amount received from the sale of g/s over the cost of producing it.

Question 16

How do firms make a profit?

Answer 16

They must sell their g/s for a price greater than the cost.

Question 17

What is cost? What is price?

Answer 17

Cost is what the producer gives up, price is what they receive.

Question 18

What is marginal cost?

Answer 18

The cost of one more unit of a g/s and the minimum price a firm will accept.

Question 19

What is a supply curve?

Answer 19

A marginal cost curve.

Question 20

What is individual supply? Market supply?

Answer 20

The relationship between the price of a good and the and quantity supplied for one producer. The relationship between the price of a good and the and quantity supplied for all producers.

Question 21

What is the “invisible hand”?

Answer 21

An idea in the Wealth of Nations that implies competitive markets send resources to their highest valued use in society

Question 22

When does market failure arise?

Answer 22

When the market delivers in inefficient outcome.

Question 23

How does market failure occur?

Answer 23

When too little is produced (underproduction) or when too much is produced (overproduction).

Question 24

What is deadweight loss?

Answer 24

A decrease/increase in total surplus.

Question 25

What are some reasons for market failure?

Answer 25

```  Price and quantity regulations  Taxes and subsidies  Externalities  Public goods and common resources  Monopoly  High transactions costs ```

Question 26

What do price regulations do? Quantity regulations?

Answer 26

Put a block on price adjustments which lead to underproduction. Limit the amount that a firm is allowed to produce causing underproduction.

Question 27

What do taxes do?

Answer 27

Increase the prices paid by buyers and lower the prices received by sellers. So taxes decrease the quantity produced and lead to underproduction.

Question 28

What do subsidies do?

Answer 28

Lower the prices paid by buyers and increase the prices received by sellers. So subsidies increase the quantity produced and lead to overproduction.

Question 29

What are externalities?

Answer 29

A cost or benefit that affects someone other than the seller or the buyer of a good. Leads to overproduction.

Question 30

What is a public good?

Answer 30

A good that benefits everyone and no one can be excluded. Leads to underproduction.

Question 31

What is a common resource?

Answer 31

Something owned by no one but everyone can use. Leads to overproduction.

Question 32

What is a monopoly?

Answer 32

A firm that has a sole provider of a g/s. Leads to underproduction.

Question 33

What are transaction costs?

Answer 33

The costs of g/s that enable a market to bring buyers and sellers together. Might underproduce if costs are high.