Allocation efficiency occurs when resources are used to create the greatest value, which means that marginal benefit equals marginal cost. 2 Distinguish between value and price and define consumer surplus. Marginal benefit is measured by the maximum price that consumers are willing to pay for another unit of a good or service. A demand curve is a marginal benefit curve. Value is what people are willing to pay; price is what people must pay. Consumer surplus equals marginal benefit minus price, summed over the quantity consumed.
Distinguish between cost and price and define producer surplus. Marginal cost is measured by the minimum price producers must be offered to increase production by one unit. A supply curve is a marginal cost curve. Opportunity cost is what producers must pay; price is what producers receive. Producer surplus equals price minus marginal cost, summed over the quantity produced. 4 Evaluate the efficiency of the alternative methods of allocating scarce resources. In a competitive equilibrium, marginal benefit equals marginal cost and resource allocation is efficient.
Price and quantity regulations, taxes, subsidies, externalities, public goods, common resources, monopoly, and high transactions costs lead to either underproduction or overproduction and create a deadweight loss. 5 Explain the main ideas about fairness and evaluate the fairness of the alternative methods of allocating scarce resources. Ideas about fairness divide Into two groups: fair results and fair rules. Fair rules require private property rights and voluntary exchange, and fair results require Income transfers from the rich to the poor.
