Economics Chapter 5: Allocating Scarce Resources

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Questions and Answers

What is deadweight loss?

Lost economic efficiency due to market disequilibrium (correct)

Lost economic efficiency due to monopoly

Lost economic efficiency due to underproduction

Lost economic efficiency due to overproduction

What is an obstacle to achieving an efficient allocation of resources in a market economy?

Monopoly

Price and Quantity Regulations

Government Subsidies

All of the Above (correct)

What is the effect of a rent ceiling below equilibrium?

Increased efficiency in the housing market

Housing surpluses and decreased search activity

No effect on the housing market

Housing shortages and increased search activity (correct)

What is the effect of a minimum wage above equilibrium?

Increased unemployment and surplus labor Signup and view all the answers

What is the effect of a tax on sellers?

Decreases supply and increases buyer prices Signup and view all the answers

What is the effect of a tax on buyers?

Decreases demand and increases seller prices Signup and view all the answers

What is the definition of a rent ceiling?

A legal minimum limit on how high rents can be charged Signup and view all the answers

What is the definition of a minimum wage?

A legal minimum price for labor Signup and view all the answers

What is the primary reason why methods of allocating scarce resources are necessary?

Resources are limited, but people's needs and wants are endless Signup and view all the answers

Which method of allocating scarce resources involves giving resources to those who arrive first?

First-Come, First-Served Signup and view all the answers

What is the relationship between marginal benefit and demand?

The demand curve shows the marginal benefit Signup and view all the answers

What happens when marginal benefit equals marginal cost?

Efficiency is achieved Signup and view all the answers

What is the producer surplus?

The benefit producers get when they sell for more than what it costs to make Signup and view all the answers

What is the purpose of allocating scarce resources?

To satisfy as many needs as possible without wasting anything Signup and view all the answers

What is an example of the command method of allocating scarce resources?

A boss assigning tasks Signup and view all the answers

What happens when consumer and producer surpluses are high?

The market is efficient Signup and view all the answers

Study Notes

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.

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This quiz covers the basics of allocating scarce resources, including market price and command methods. Test your understanding of economics chapter 5!