Chapter 4 Summary THE PRICE SYSTEM RATIONING AND ALLOCATING RESOURCES p 79 1 In a market economy the market system or price system serves two functions It determines the allocation of resources among producers and the final mix of outputs It also distributes goods and services on the basis of willingness ability to pay In this sense it serves as a price rationing device 2 Governments as well as private firms sometimes decide not to use the market system to ration an item for which there is excess demand Examples of nonprice rationing systems include queuing favored customers and ration coupons The most common rationale for such policies is fairness 3 Attempts to bypass the market use alternative nonprice rationing devices are more difficult costly than it would seem at first glance Schemes that open up opportunities for favored customers black markets and side payments often end up less fair than the free market SUPPLY AND DEMAND ANALYSIS AN OIL IMPORT FEE p 86 4 The basic logic of supply and demand is a powerful tool for analysis For example supply and demand analysis shows that an oil import tax will reduce quantity of oil demanded increase domestic production and generate revenues for the government SUPPLY AND DEMAND AND MARKET EFFICIENCY p 88 5 Supply and demand curves can also be used to illustrate the idea of market efficiency an important aspect of normative economics 6 Consumer surplus is the difference between the max amount a person is willing to pay for a good the current market price 7 Producer surplus is the difference between the current market price the cost of production for the firm 8 At free market equilibrium with competitive markets the sum of consumer surplus is maximized 9 The total loss of producer consumer surplus from underproduction and overproduction is referred to as a deadweight loss