Chapter 5: Efficiency and Equity

Question 1

Big trade-off

Answer 1

trade-off between efficiency and fairness.

Question 2

Consumer surplus

Answer 2

excess of the benefit received from a good over the amount paid for it. It is calculated as the marginal benefit (or value) of a good minus its price, summed over the quantity bought.

Question 3

Command system

Answer 3

method of allocating resources by the order (command) of someone in authority. In a firm a managerial hierarchy organizes production.

Question 4

Deadweight loss

Answer 4

measure of inefficiency. It is equal to the decrease in total surplus that results from an inefficient level of production.

Question 5

Market failure

Answer 5

situation in which a market delivers an inefficient outcome.

Question 6

Producer surplus

Answer 6

excess of the amount received from the sale of a good or service over the cost of producing it. It is calculated as the price of a good minus the marginal cost (or minimum supply-price), summed over the quantity sold.

Question 7

Symmetry principle

Answer 7

requirement that people in similar situations be treated similarly.

Question 8

Total surplus

Answer 8

sum of consumer surplus and producer surplus.

Question 9

Transactions costs

Answer 9

opportunity costs of making trades in a market. The costs that arise from finding someone with whom to do business, of reaching an agreement about the price and other aspects of the exchange, and of ensuring that the terms of the agreement are fulfilled.

Question 10

Utilitarianism

Answer 10

principle that states that we should strive to achieve “the greatest happiness for the greatest number of people.”