7. Single-price Monopoly’s and Competition Compared
The figure shows the
efficiency of a monopoly
Because price exceeds
marginal social cost, marginal
social benefit exceed
marginal social cost, and a
deadweight loss arise
10. Resource allocation methods
Scarce resources might be allocated by using any or some combination of the following
methods:
• Market price
• Command
• Majority rule
• Contest
• First-come, first-served
• Sharing equally
• Lottery
• Personal characteristics
• Force
11. Demand and Marginal Benefit
• The relationship between the price of a good and the quantity demanded by one person
is called individual demand.
• Market demand curve is the sum of individual demand curves
• Demand, Willingness to Pay and Value
• Value is what we get, price is what we pay
• The value of one more unit of a good or service is its marginal benefit (MB)
• We measure value as the maximum price a person is willing to pay (WTP).
• WTP for a good or service determines demand.
• A demand curve is a marginal benefit curve.
14. Consumer Surplus
Assume the price = £1.00
•Consumer surplus
Area under the demand
curve and above the
price line.
15. • Assume the price = £1.50
• Consumer surplus
Area under the demand curve and above the
price line.
Demand and Marginal Benefit
16. Supply and Marginal Cost
Supply, Cost and Minimum Supply-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.
Minimum supply-price determines supply.
A supply curve is a marginal cost curve.
17. Individual Supply and Market Supply
• The relationship between the price of a good and the quantity supplied by one
producer is called individual supply.
• Market supply is the sum of individual firms’ supply curves.
• Supply curve = MC curve.
• Supply curve shows:
•At any price, how much will the firm produce.
•At any quantity, what is each firm’s MC
Supply and Marginal Cost
18. At any price, how much will the firm produce:
At £15; QS= 100
At any quantity, what is the firm’s MC.
At QS= 100; MC = £15
Supply and Marginal Cost
19. Producer Surplus
Producer receives gain in excess of marginal cost
• Assume the price = £15
• Producer Surplus
Area above the supply curve and below the price line.
20. • Assume the price = £10
• Producer Surplus
•Area above the supply curve and below the price line.
Producer Surplus
21. Is the competitive market efficient?
Efficiency of Competitive Equilibrium
Efficient allocation of resources where:
QD= QS
MSB = MSC
In equilibrium, total surplus is maximized.
22. Market Failure
• Markets do not always achieve an efficient outcome.
• We call a situation in which a market delivers an inefficient outcome one of
market failure.
Market failure can occur due to:
• Underproduction
• Overproduction
Is the competitive market efficient?
26. Is the competitive market efficient?
Sources of market failures
1. Externalities
2. Public goods (e.g. National defence, roads) and common resources
3. Imperfect information, or information asymmetry
4. Taxes and subsidies
5. Price and quantity regulations
6. Monopoly
7. High transaction costs
27. Imperfect information
Adverse selection
• Recruiting an employee, people in job interviews
• Buying insurance
• Telemarketing investment advice
• Selling used cars
Moral hazard
• Government’s promise to bails out loss-making banks
28. Public goods and common resources
When resources are commonly owned, they will be overused. The
tragedy of the commons strikes when no one has the right to exclude
• Overfishing
• Over-grazing
• Commonly shared secretary
• Fixed-fee internet pricing plan
