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What are the alternative methods for allocating scarce resources?
What are the alternative methods for allocating scarce resources?
Market price, Command, Majority rule, Contest, First-come, first-served, Lottery, Personal characteristics, Force
How does a market allocate a scarce resource?
How does a market allocate a scarce resource?
Majority rule allocates resources based on individual preferences.
Majority rule allocates resources based on individual preferences.
False
Consumer surplus is calculated as the marginal benefit minus ____ over the quantity bought.
Consumer surplus is calculated as the marginal benefit minus ____ over the quantity bought.
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Match the resource allocation method with its description:
Match the resource allocation method with its description:
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In equilibrium, what happens to the quantity demanded and the quantity supplied?
In equilibrium, what happens to the quantity demanded and the quantity supplied?
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When production is equal to the equilibrium quantity:
When production is equal to the equilibrium quantity:
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According to Adam Smith's 'invisible hand' idea, competitive markets lead to an efficient allocation of resources.
According to Adam Smith's 'invisible hand' idea, competitive markets lead to an efficient allocation of resources.
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What happens when total surplus is maximized?
What happens when total surplus is maximized?
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What is the term used to describe it when too little of an item is produced in a market?
What is the term used to describe it when too little of an item is produced in a market?
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What can lead to underproduction in a market according to the content?
What can lead to underproduction in a market according to the content?
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What effect do subsidies have on the quantity produced in a market?
What effect do subsidies have on the quantity produced in a market?
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What causes overproduction due to externalities?
What causes overproduction due to externalities?
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What is the term used to describe the situation when a monopoly produces too little?
What is the term used to describe the situation when a monopoly produces too little?
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Match the source of market failure with its description:
Match the source of market failure with its description:
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Study Notes
Resource Allocation Methods
- Alternative methods for allocating scarce resources:
- Market price
- Command
- Majority rule
- Contest
- First-come, first-served
- Lottery
- Personal characteristics
- Force
Market Price
- Allocates resources to those who are willing to pay the market price
- Most goods and services are allocated by market price
- Works well for most goods and services
Command
- Allocates resources by the order of someone in authority
- Works well in organizations with clear lines of authority
- Does not work well in an entire economy
Majority Rule
- Allocates resources based on the majority vote
- Works well for decisions that affect many people
- Requires self-interest to be suppressed for efficient use of resources
Contest
- Allocates resources to the winner
- Works well when efforts are hard to monitor and reward directly
First-Come, First-Served
- Allocates resources to those who are first in line
- Works well when resources can only serve one person at a time in a sequence
Lottery
- Allocates resources randomly
- Works well when there is no effective way to distinguish among potential users
Personal Characteristics
- Allocates resources based on personal characteristics
- Can be used in unacceptable ways (e.g., discrimination)
Force
- Allocates resources through force or coercion
- Can be used to distribute resources, but not an effective way to allocate resources
Benefit, Cost, and Surplus
- Value is what we get, price is what we pay
- Marginal benefit is the value of one more unit of a good or service
- Demand is the relationship between the price of a good and the quantity demanded
Individual Demand and Market Demand
- Individual demand is the relationship between the price of a good and the quantity demanded by one person
- Market demand is the relationship between the price of a good and the quantity demanded by all buyers in the market
Consumer Surplus
- The excess of the benefit received from a good over the amount paid for it
- Calculated as the marginal benefit minus the price, summed over the quantity bought
Supply and Marginal Cost
- Supply is the relationship between the price of a good and the quantity supplied
- Marginal cost is the cost of one more unit of a good or service
Producer Surplus
- The excess of the amount received from the sale of a good over the cost of producing it
- Calculated as the price received minus the marginal cost, summed over the quantity sold
Is the Competitive Market Efficient?
- Efficient allocation of resources occurs when the quantity demanded equals the quantity supplied
- Resources are used efficiently when marginal social benefit equals marginal social cost
- Market failure occurs when the market delivers an inefficient outcome
Market Failure
- Sources of market failure:
- Price and quantity regulations
- Taxes and subsidies
- Externalities
- Public goods and common resources
- Monopoly
- High transactions costs
Is the Competitive Market Fair?
- Ideas about fairness:
- It's not fair if the result isn't fair
- It's not fair if the rules aren't fair
- Utilitarianism: the principle that strives to achieve the greatest happiness for the greatest number
- The big tradeoff: between efficiency and fairness
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Description
This quiz covers the allocation of scarce resources, consumer and producer surplus, efficient and inefficient markets, and fairness in economics.