Foundations of Microeconomics: Efficiency and Fairness of Markets

This set of vocabulary flashcards covers the fundamental concepts of resource allocation methods, allocative efficiency, consumer and producer surplus, market failure, and theories of economic fairness based on Ninth Edition lecture notes.

Market Price

A resource allocation method where the people who get the resource are those who are willing to pay the set price.

Command System

A method that allocates resources by the order of someone in authority; works well in organizations but poorly for an entire economy.

Majority Rule

An allocation method where resources are distributed in the way that a majority of voters choose, often used for tax rates and public spending.

Contest

A method that allocates resources to a winner or group of winners; works best when efforts are hard to monitor directly.

First-Come, First-Served

An allocation method that gives resources to those first in line; effective for resources that serve one person at a time in sequence.

Sharing Equally

A method where everyone gets the same amount of a resource; requires agreement on use and works best for small groups with common goals.

Lottery

An allocation method based on winning numbers or lucky draws; used when there is no effective way to distinguish among potential users.

Personal Characteristics

An allocation method where resources go to those with the "right" traits; though used for choosing marriage partners, it can lead to discrimination in jobs.

Force

A method of allocating resources through war, theft, or state wealth transfers and legal frameworks.

Allocative Efficiency

A situation where quantities of goods and services produced are those that people value most highly, occurring where $MB = MC$.

Production Efficiency

Producing at any point directly on the Production Possibility Frontier ($PPF$).

Marginal Benefit ($MB$)

The benefit a person receives from consuming one more unit of a good, measured by what they are willing to forgo.

Principle of Decreasing Marginal Benefit

The concept that the marginal benefit from a good decreases as the quantity of that good increases.

Marginal Cost ($MC$)

The opportunity cost of producing one more unit of a good, measured by the slope of the $PPF$.

Consumer Surplus ($CS$)

The marginal benefit from a good minus the price paid for it, summed over the quantity consumed: $CS = MB - P$.

Producer Surplus ($PS$)

The price of a good minus the opportunity cost of producing it, summed over the quantity produced: $PS = P - MC$.

Total Surplus ($TS$)

The sum of consumer surplus and producer surplus ($TS = CS + PS$); it is maximized at competitive equilibrium.

Invisible Hand

Adam Smith's idea from "The Wealth of Nations" (1776) that participants in a competitive market promote social interest while pursuing self-interest.

Market Failure

A situation in which the market delivers an inefficient outcome, such as underproduction ($Q < Q_{efficient}$) or overproduction ($Q > Q_{efficient}$).

Deadweight Loss ($DWL$)

The decrease in total surplus resulting from inefficient underproduction or overproduction, borne by the entire society.

Externality

A cost or benefit that affects someone other than the seller or the buyer of a good, such as acid rain from a utility (cost) or a neighbor's smoke detector (benefit).

Public Good

A good that benefits everyone and from which no one can be excluded, often leading to underproduction due to the free-rider problem.

Common Resource

A resource owned by no one but used by everyone, often leading to overproduction due to the "tragedy of the commons."

Monopoly

A firm that is the sole provider of a good or service and maximizes profit by setting prices that lead to underproduction.

Transactions Costs

The opportunity costs of making trades in a market; high costs can lead to market underproduction.

Robert Nozick

Philosopher who argued in "Anarchy, State, and Utopia" (1974) that fairness is based on fair rules: protecting private property and voluntary exchange.

The Big Tradeoff

The tradeoff between efficiency and fairness, specifically the decrease in economic pie size as income redistribution/taxation increases.