econ - unit 9 - ch.5 & summary

Why Resource Allocation Matters

• People make self-interested choices every day—eating out, taking Uber, or using public transit.

• These choices can cause inefficiencies (queues, overuse, or underuse).

• Question: Are resources being used efficiently and fairly?

___ pricing (higher fares during busy hours) can ___ efficiency—by aligning use with value—but may raise fairness concerns.

peak, improve

___Price

Resources go to those ___and ___to pay. Prices ___to balance supply & demand.

Markets are competitive, prices can adjust __.

Prices ___ or slow to change.

___ markets (___, copper), Uber surge pricing.

Method

Definition

Works Well When...

Fails When...

Example

market, willing, able, adjust, quickly, fixed, commodity, oil

Method

Definition

Works Well When...

Fails When...

Example

___

Resources allocated by authority (orders).

Clear responsibilities, easy to monitor.

Too complex to oversee, risk of inefficiency.

Government departments, firms; ____is a failure example.

command, north korea 

Method

Definition

Works Well When...

Fails When...

Example

___Rule

Allocation decided by voting.

Affects many people and needs consensus.

When majority acts in self-interest, harming minorities.

___, public spending (taxes, education, healthcare).

majority, elections 

Method

Definition

Works Well When...

Fails When...

Example

___

Resources go to the winner(s).

Performance is hard to monitor but effort is motivated.

Creates ___—few winners, many losers.

Sports, job promotions, innovation contests.

contest, inequality

Method

Definition

Works Well When...

Fails When...

Example

___, ___

First in line gets the resource.

Resources limited but easily queued for.

Causes long waits or inefficiency if time wasted.

Restaurants, highway access, ATMs.

first-come, first served 

Method

Definition

Works Well When...

Fails When...

Example

___

Random allocation (luck).

Users are indistinguishable.

Randomness ignores value or need.

Lotto Max, marathon entry, airport landing slots.

lottery 

Method

Definition

Works Well When...

Fails When...

Example

___ ___

Based on traits or identity.

Useful for personal choices.

Can cause __

Marriage choice vs. job discrimination.

personal traits, discrimination 

Method

Definition

Works Well When...

Fails When...

Example

__

Using power or coercion.

Upholds law and property rights.

When used for war or theft.

Taxes, legal enforcement vs. war or crime.

force

💰 2. Efficiency: Benefit, Cost, and Surplus

Resources are used efficiently when they produce goods and services people value most highly—when ___= ___

MB=MC 

🔸 Demand, Marginal Benefit, and Consumer Surplus

Demand and Value

• Value = what we get.

• Price = what we pay.

Marginal Benefit (MB) = the value of ___—measured by ___

one more unit, willingness to pay

Demand, Marginal Benefit, and Consumer Surplus

Demand and Value

• Value = what we get.

• Price = what we pay.

Marginal Benefit (MB) = the value of one more unit—measured by willingness to pay.

Therefore, the ____curve = marginal benefit curve (and also the ___)

demand, MSB 

Consumer Surplus (CS) = ____ - ___

total benefit - amount paid 

Consumer Surplus

• Consumer Surplus (CS) = Total benefit – Amount paid

Measured as the area under the ___ ***curve and above the price line.

demand

***consumer surplus formula - Consumer Surplus = ___ × ___ (Quantity) × ___ (__ − ___)

½ x base x height (mb - price)

Individual demand = one person’s ___ at each price.

qd

Market demand = __ of all individuals’ demands.

sum

Market demand = ___

marginal social benefit

Cost = what the firm ___ to produce a good.

Price = what the firm receives.

gives up

Marginal Cost (MC) = cost of producing___

one more unit 

Minimum supply price = lowest price that covers __.

MC

Therefore, the supply curve = ____ curve (and also the MSC).

MC 

Producer Surplus (PS) =

amount received - cost of production 

producer surplus - Measured as the area ___ the ____curve and ___ the ___ line.

above, supply, below, price 

***Formula: Producer Surplus = ___ × ___ (Quantity) × ___ (___ − ___)

½, base, height, price - cost

• Individual supply = one producer’s supply.

• Market supply = horizontal sum of all producers’ supply.

Market supply =__ 

marginal social cost 

Efficient Market Condition: A market is efficient when: ___ = ___

MSB = MSC

Efficient Market Condition: A market is efficient when: MSB = MSC

Equilibrium price and quantity automatically achieve this in a __market.

competitive

Total Surplus (TS): TS = CS + PS 

• Maximized at the efficient quantity.

Reflects __welfare—the total benefit to society.

social 

Conclusion: Competitive markets naturally move toward equilibrium, achieving ___ efficiency and maximizing ___

allocative, total surplus 

 The Invisible Hand (Adam Smith)

• Individuals acting in self-interest promote social interest indirectly.

• Buying a pizza benefits you, but also signals producers to make efficient amounts.

The “invisible hand” guides resources to their __ use.

highest-valued 

Underproduction

Quantity < efficient level

___ > MC → missed __

MB, opportunities

___

Quantity > efficient level

MC __ MB → ___resources

overproduction, >, wasted

Deadweight Loss (DWL): The loss in ___ from inefficiency (shown as a grey triangle).

total surplus

Price Regulations

Price ceilings/floors prevent ___price adjustment.

.

natural, underproduction 

____Regulations

Limits on production/output.

.

quantity, underproduction 

Taxes

Raise buyer prices, lower prices.

.

underproduction 

Subsidies

Payments to ___.

.

producers, overproduction 

Externalities

Unaccounted costs/___ to 3rd parties.

External cost → ___; External benefit → ___.

benefits, overproduction, underproduction

Public Goods

Everyone benefits; __.

___(free-rider problem).

non-excludable, underproduction 

Shared, non-owned resources (fish stocks).

Overuse (tragedy of the __).

common resources, commons

Monopoly

One seller sets price __ cost.

>, underproduction 

High transaction costs

Costs of making ___(legal fees).

Market may not operate → __.

trades, underproduction 

🧠 5. Alternatives to Market Allocation

When markets fail, non-market methods can sometimes help—but each has limits.

Alternative	Usefulness	Limitation
Majority Rule	Can ___ resources (___, subsidies).	Can favor self-interested majorities.

redistribute, taxes

___ Systems	Avoid transaction costs inside firms.	Risk of ___, bureaucracy.

command, inefficiency

First-Come, First-Serve

Simple when markets ___.

Can waste time (__).

impractical, queues

Consumer Surplus = ___ - ___

MB - price

Producer Surplus: ___ – __

price - MC

total surplus

CS + PS

efficiency: ____ = ___

MB=MC

efficiency occurs in competitive markets when

MSB = MSC

Market failure occurs when __≠ efficient quantity.

output 

 Efficient markets balance benefit and cost (MSB = MSC), maximizing total surplus.
Any distortion—taxes, monopolies, or externalities—creates ___ and inefficiency.

DWL