Notesale: Turn your study into money

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Market efficiency and market failure [5,6]

Resource allocation methods

Scarce resources might be allocated by using any or some combination of the following key methods:
• Market price
• Command system
• Majority rule
• Lottery

Demand and marginal benefit

Demand, willingness to pay and value
- Value is what we get, price is what we pay
...

- The relationship between the price of a good and the quantity demanded by all buyers in the
market is called market demand

Individual demand curve = marginal benefit curve
Market demand curve = marginal social benefit curve

Consumer surplus
• Consumer surplus is the excess of the benefit received from a good over the amount paid for it
• It is measured by the area under the demand curve and above the price paid, up to the quantity
bought

Supply and marginal cost

Supply, Cost and Minimum Supply-price
• The cost of one more unit of a good or service is its marginal cost
• The marginal cost is the minimum price that a supplier is willing to receive in order to sell one more
unit of the product
• The supply curve is also the marginal cost curve

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
Firms marginal cost curve = individual supply curve
Market supply curve = market social cost curve

Producer surplus
• Producer surplus is the amount received from the sale of a good or service the excess of the cost of
producing it
• It is measured by the area below the market price and above the supply curve, summed over the
quantity sold



Efficiency of competitive equilibrium

In equilibrium, total surplus (the sum of producer surplus and consumer
surplus) is maximized
...

- Tax incidence is the division of the burden of a tax between the buyer
and the seller

A tax on sellers
Supply decreases and the curve S + tax on sellers shows the new supply curve

Taxes and elasticity

Tax Division and Elasticity
• The division of the tax between buyers and sellers depends on the elasticities of demand and
supply
• The more inelastic the demand, the larger is the buyers’ share of the tax (example Alcohol, tobacco
and petrol)
• The more inelastic the supply, the larger is the sellers’ share of the tax (example workers pay most
of the National Insurance contribution)

Taxes and efficiency






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