ECON 0100 1st Edition Lecture 8 Outline of Last Lecture I Price Elasticity of Demand A Types of Demand Elasticity 1 Inelastic Demand 2 Unit Elastic Demand 3 Elastic Demand B Factors that influence demand elasticity C Total Revenue and Elasticity D Expenditure and Elasticity E Income Elasticity of Demand F Cross Elasticity of Demand II Elasticity of Supply A Three Cases of Elasticity of Supply B Factors That Influence Elasticity of Supply C Time Frame For Supply Decision Outline of Current Lecture I Resource Allocation Methods A Market Price B Command C Majority Rule D Contest E First Come First Served F Lottery G Personal Characteristics H Force II Benefit Cost and Surplus A Value B Individual Demand Market Demand Consumer Surplus C Individual Supply Market Supply Producer Surplus Current Lecture Resource Allocation Methods Scare Resources might be allocated by 1 Market Price These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute 2 3 4 5 6 7 a When a market allocates a scarce resource the people who get the resource are those who are willing to pay the market price b Most of the scarce resources that you supply get allocated by market price Command a Command systemallocates resources by the order command of someone in authority b For example if you have a job most likely someone tells you what to do your labor time is allocated to specific tasks by command c A command system works well in organizations with clear lines of authority but badly in an entire economy Majority Rule a Majority rule allocates resources in the way the majority of voters choose b Societies use majority rule for some of their biggest decisions example tax rates that allocate resources between private and public use and tax dollars between competing uses such as defense and health care c Majority rule works well when the decision affects lots of people and selfinterest must be suppressed to use resources efficiently Contest a A contest allocates resources to a winner or group of winners b The most obvious contests are sporting events but they occur in other arenas example the Oscars c A contest works well when the efforts of the players are hard to monitor and reward directly First Come First Served a First come first served allocates resources to those who are first in line b Casual restaurants use first come first served to allocate tables supermarkets also uses first come first served at checkout c First come first served works best when scarce resources can serve just one person at a time in a sequence Lottery a Lotteries allocate resources to those with the winning number who draw the lucky cards or who come up lucky on some other gaming system b State lotteries and casinos reallocate millions of dollars worth of goods and services each year but lotteries are more widespread example they are used to allocate landing slots at some airports c Lotteries work well when there is no effective way to distinguish among potential users of a scarce resource Personal Characteristics a Personal characteristics allocate resources to those with the right characteristics example people choose marriage partners on the basis of personal characteristics b This method gets used in unacceptable ways allocating the best jobs to white males and discriminating against minorities and women 8 Force a Force plays a role in allocating resources example war has played an enormous role historically in allocating resources theft taking property of others without their consent also plays a large role b But force provides an effective way of allocating resources for the state to transfer wealth from the rich to the poor and establish the legal framework in which voluntary exchange can take place in markets Benefit Cost and Surplus Demand Willingness to Pay and Value Value is what we get price is what we pay We measure value as the maximum pricethat a person is willing to pay Individual Demand and Market Demand The relationship between the price of a good and the quantity demanded by one person is called individual demand The relationship between the price of a good and the quantity demanded by all buyers in the market is called market demand The market demand curve is the horizontal sum of the individual demand curves Consumer Surplus Consumer surplus is the excess of the benefit received from a good over the amount paid for it We can calculate consumer surplus as the marginal benefit or value of a good minus its price summed over the quantity bought It is measured by the area under the demand curve and above the price paid up to the quantity bought Supply and Marginal Cost Firms are in business to make a profit to make a profit firms must sell their output for a price that exceeds the cost of production Firms distinguish between cost and price Cost is what the producer gives up price is what the producer receives The cost of one more unit of a good or service is its marginal cost marginal cost is the minimum price that a firm is willing to accept but theminimum supply price determines supply Individual Supply and Market Supply The relationship between the price of a good and the quantity supplied by one producer is called individual supply The relationship between the price of a good and the quantity supplied by all producers in the market is called market supply The market supply curve is the horizontal sum of the individual supply curves Producer Surplus Producer surplus is the excess of the amount received from the sale of a good over the cost of producing it We calculate it as the price received for a good minus the minimum supply price marginal cost summed over the quantity sold On a graph producer surplus is shown by the area below the market price and above the supply curve summed over the quantity sold