Economics Chapter 5: Allocating Scarce Resources

Allocating Scarce Resources

• Resources are limited, but people's needs and wants are endless, making methods of allocating scarce resources necessary.
• Alternative methods of allocating scarce resources include:
  • Market Price: Resources go to those who can pay.
  • Command: Resources are given by someone in charge.
  • Majority Rule: Resources are decided by a vote.
  • Contest: Resources go to the winner.
  • First-Come, First-Served: Resources go to those who arrive first.
  • Lottery: Resources are given by chance.
  • Personal Characteristics: Resources are given based on traits.
  • Force: Resources are taken by force.

Marginal Benefit, Marginal Cost, Demand, and Supply

• Marginal Benefit (MB): The extra benefit from one more unit, shown by the demand curve.
• Marginal Cost (MC): The extra cost to make one more unit, shown by the supply curve.
• Demand: How much people want something, based on MB.
• Supply: How much producers are willing to make, based on MC.
• Efficiency is when MB equals MC, meaning supply matches demand.

Consumer and Producer Surpluses

• Consumer Surplus: The benefit consumers get when they pay less than what they're willing to pay.
• Producer Surplus: The benefit producers get when they sell for more than what it costs to make.
• When both surpluses are high, the market is efficient because resources are used in the best way to benefit everyone.

Deadweight Loss

• Deadweight Loss: Lost economic efficiency when the market is not in equilibrium.
• Occurs with underproduction (making too little) or overproduction (making too much).

Obstacles to Achieving Efficient Allocation of Resources

• Price and Quantity Regulations: Rules that limit prices or quantities.
• Taxes and Subsidies: Taxes increase costs, and subsidies lower costs, disrupting balance.
• Externalities: Costs or benefits affecting others not involved in the transaction.
• Public Goods and Common Resources: Free-rider problems and overuse.
• Monopoly: Single seller controls the market.
• High Transaction Costs: High costs of making trades or deals.

Government Actions in Markets

Rent Ceilings

• Definition: A rent ceiling is a legal limit on how high rents can be charged.
• Effects:
  • Above equilibrium: No effect.
  • Below equilibrium: Creates housing shortages, increased search activity, and black markets.
  • Inefficiency: Leads to underproduction, deadweight loss, and increased search costs.
  • Fairness: Inefficient and often unfair as it doesn’t necessarily benefit the poorest.

Minimum Wage

• Definition: A minimum wage is a legal minimum price for labor.
• Effects:
  • Above equilibrium: Creates unemployment and surplus labor.
  • Below equilibrium: No effect.
  • Inefficiency: Causes deadweight loss and increased job search costs.
  • Fairness: Considered unfair because it can increase unemployment and doesn’t benefit the least well-off uniformly.

Taxes

• Tax Incidence: The division of the tax burden between buyers and sellers.
• Effects:
  • Tax on Sellers: Decreases supply, increases buyer prices, decreases seller prices.
  • Tax on Buyers: Decreases demand, increases buyer prices, decreases seller prices.