Microeconomics Chapter: Efficiency and Equity

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Questions and Answers

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?

To the highest bidder

Randomly selected individuals

To those willing to pay the market price (correct)

To those who need it the most

Majority rule allocates resources based on individual preferences.

False

Consumer surplus is calculated as the marginal benefit minus ____ over the quantity bought.

price Signup and view all the answers

Match the resource allocation method with its description:

First-Come, First-Served = Allocates resources to those who are first in line Lottery = Allocates resources to those with the winning number or lucky outcome Personal Characteristics = Allocates resources based on certain characteristics Force = Plays a role in allocating resources, e.g., war or theft Signup and view all the answers

In equilibrium, what happens to the quantity demanded and the quantity supplied?

They are equal. Signup and view all the answers

When production is equal to the equilibrium quantity:

MSC = MSB Signup and view all the answers

According to Adam Smith's 'invisible hand' idea, competitive markets lead to an efficient allocation of resources.

True Signup and view all the answers

What happens when total surplus is maximized?

Efficient quantity is produced. Signup and view all the answers

What is the term used to describe it when too little of an item is produced in a market?

Underproduction Signup and view all the answers

What can lead to underproduction in a market according to the content?

Price and quantity regulations Signup and view all the answers

What effect do subsidies have on the quantity produced in a market?

Increase Signup and view all the answers

What causes overproduction due to externalities?

External cost creation Signup and view all the answers

What is the term used to describe the situation when a monopoly produces too little?

Underproduction Signup and view all the answers

Match the source of market failure with its description:

Taxes and subsidies = Lead to underproduction or overproduction Monopoly = Sole provider of a good or service Externalities = Cost or benefit affecting parties not involved in the transaction Signup and view all the answers

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