ECON 0100 1st EditionLecture 8Outline of Last Lecture I. Price Elasticity of DemandA. Types of Demand Elasticity 1. Inelastic Demand2. Unit Elastic Demand3. Elastic DemandB. Factors that influence demand elasticity C. Total Revenue and Elasticity D. Expenditure and Elasticity E. Income Elasticity of Demand F. Cross Elasticity of DemandII. Elasticity of Supply A. Three Cases of Elasticity of SupplyB. Factors That Influence Elasticity of SupplyC. Time Frame For Supply Decision Outline of Current Lecture I. Resource Allocation MethodsA. Market PriceB. CommandC. Majority RuleD. ContestE. First-Come, First-ServedF. LotteryG. Personal CharacteristicsH. ForceII. Benefit, Cost, and SurplusA. ValueB. Individual Demand, Market Demand, Consumer SurplusC. Individual Supply, Market Supply, Producer Surplus Current Lecture- Resource Allocation Methods- Scare Resources might be allocated by1. Market PriceThese 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.a. When a market allocates a scarce resource, the people who get the resource are those who are willing to pay the market priceb. Most of the scarce resources that you supply get allocated by market price2. Commanda. Command systemallocates resources by the order (command) of someone in authorityb. For example, if you have a job, most likely someone tells you what to do  your labor time is allocated to specific tasks by commandc. A command system works well in organizations with clear lines of authority but badly in an entire economy3. Majority Rulea. Majority rule allocates resources in the way the majority of voters chooseb. Societies use majority rule for some of their biggest decisions  example; taxrates that allocate resources between private and public use and tax dollars between competing uses such as defense and health carec. Majority rule works well when the decision affects lots of people and self-interest must be suppressed to use resources efficiently4. 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 directly5. First-Come, First-Serveda. First-come, first-served allocates resources to those who are first in lineb. Casual restaurants use first-come, first served to allocate tables, supermarkets also uses first-come, first-served at checkoutc. First-come, first-served works best when scarce resources can serve just one person at a time in a sequence6. Lotterya. Lotteries allocate resources to those with the winning number, who draw the lucky cards, or who come up lucky on some other gaming systemb. State lotteries and casinos reallocate millions of dollars worth of goods and services each year  but lotteries are more widespread  example; they areused to allocate landing slots at some airportsc. Lotteries work well when there is no effective way to distinguish among potential users of a scarce resource7. Personal Characteristicsa. Personal characteristics allocate resources to those with the “right” characteristics  example; people choose marriage partners on the basis of personal characteristicsb. This method gets used in unacceptable ways: allocating the best jobs to whitemales and discriminating against minorities and women8. Forcea. 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 roleb. 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 inwhich 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 goodover 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