Efficiency and Equity - Key Topics (Vocabulary Flashcards)

A set of vocabulary flashcards covering key concepts from the lectures on efficiency, market mechanisms, and market failures.

Market Price

When scarce resources are allocated to those willing to pay the market price; the market price helps determine who gets the resource and, for many goods, this system works well.

Command

An allocation method where resources are distributed by the order of someone in authority; effective in clear hierarchies but inefficient for entire economies.

Majority Rule

Allocation based on the choice of the majority; used for decisions affecting many people, such as tax rates and public uses.

Contest

A method where resources go to a winner or group of winners; effective when effort is hard to monitor or reward directly.

First-Come, First-Served

Resources go to those who are first in line; works best when scarce resources can serve one person at a time in sequence.

Lottery

Resources allocated to those with winning numbers or lucky draws; useful when no mechanism can distinguish among potential users.

Personal Characteristics

Allocation based on characteristics (e.g., race, gender); can be discriminatory and unethical in many contexts.

Force

Allocation through coercion, war, or theft; plays a role in history but typically reduces efficiency.

Demand

Relationship between the price of a good and the quantity buyers are willing to purchase; determined by willingness to pay.

Willingness to Pay

Maximum price a buyer is prepared to pay for a good or service; determines the quantity demanded.

Value

The benefit received from one more unit of a good or service; the quantity is measured by marginal benefit.

Marginal Benefit

The additional benefit received from one extra unit of a good or service.

Demand Curve

A curve that shows the marginal benefit of each quantity demanded; effectively the marginal benefit curve.

Individual Demand

The relationship between price and quantity demanded by a single buyer.

Market Demand

The total quantity demanded by all buyers at each price; the horizontal sum of individual demand curves.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay; area under the demand curve and above price.

Producer Surplus

The difference between the price producers receive and the minimum price they would accept (marginal cost); area above the supply curve and below price.

Marginal Cost

The cost of producing one more unit of a good; the minimum price a firm is willing to accept.

Cost

The opportunity cost borne by the producer; differs from the market price.

Supply Curve

A marginal cost curve; shows how many units producers are willing to supply at each price.

Individual Supply

The relationship between price and quantity supplied by a single producer.

Market Supply

The total quantity supplied by all producers at each price; the horizontal sum of individual supplies.

Equilibrium

Where quantity supplied equals quantity demanded; markets clear.

Efficiency of Competitive Equilibrium

At equilibrium, MSB equals MSC and total surplus (consumer plus producer) is maximized.

The Invisible Hand

Adam Smith’s idea that competitive markets allocate resources to their highest-valued use through self-interest.

Market Failure

When markets fail to achieve an efficient outcome, due to regulation, externalities, public goods, monopoly, or high transactions costs.

Deadweight Loss

Reduction in total surplus from underproduction or overproduction relative to the efficient quantity.

Underproduction

Producing less than the efficient quantity; can create deadweight loss.

Overproduction

Producing more than the efficient quantity; can create deadweight loss.

Price Regulations

Regulations that fix or limit prices, potentially causing underproduction.

Quantity Regulations

Limits on the amount that can be produced; can lead to underproduction.

Taxes

Taxes raise prices for buyers and lower prices received by sellers, typically reducing quantity and causing underproduction.

Subsidies

Payments that lower costs for buyers or raise receipts for sellers, often increasing quantity and potentially causing overproduction.

Externalities

Costs or benefits of a transaction affecting others not directly involved in the market.

Public Goods

Goods that are non-excludable and non-rival; prone to free-rider problems and underproduction.

Common Resources

Resources owned by no one but available to all; can be overused, leading to tragedy of the commons.

Free Rider Problem

When individuals rely on others to pay for a public good, leading to under-provision.

Tragedy of the Commons

Overuse of a shared resource because each user acts in self-interest at the expense of others.

Monopoly

A market with a single seller; the seller can set prices, often leading to underproduction.

High Transaction Costs

Costs of making trades that can prevent efficient market activity, potentially causing underproduction.