By : Group 3

Dian Vitasari
Ayu Lestari Ari Pandowo Anasta Ensenanda W.

Efficiency and equity

1.

2.

Efficiency is the economy getting the most of out its scarce resources (or are they being wasted)? 1. Technical efficiency is production being done at lowest unit cost? 2. Allocative efficiency are resources being used to make products that people want? Equity how fair is the distribution of products between different members of society? 1. Horizontal equity no discrimination between people whose economic characteristics and performance are equal 2. Vertical equity different treatment of different people in order to reduce the differences between people .

Resource allocation methods

Resources may be allocated by : Maket price Command Majority rule Contest Lottery Personal characteristic Force

Market price
The worlds dominant rationing system is the price mechanism. Prices are determined in markets (as a result of the interplay of demand and supply). Given the correct economic conditions, advocates of market economies believe they lead to the best allocation of resources and the highest level of net economic welfare. When the market price allocates a scarce resource,the people who are the willing and able to pay that price get the resource. Two kind of people decide not to pay the market price : 1. Those who can afford to pay but choose not to buy 2. Those who are too poor and simply cannt afford to buy

Command
a command system allocates the resource by the order (command). a command system works well in organizations in which the lines of authority and responsibility are clear and it is easy to monitor the activities being performed.

Majority rule
majority rule allocate the resouce in the way that the majority of voters choose.majprity rule works when the decisions being made affect large number of people and self-interest must be suppressed to use resources most effectively.

Contest
A contest allocates resources to a winner. Contest do a good job when the efforts of the players are hard to monitor and reward.

First-In,First-Served
This method allocates resources to those who are first in line. Works best when a scarce resource can serve just one user at a time in a sequence.

Lottery
Lotteries allocate resources to those who pick the winning number, draw the lucky cards, or come up lucky on some other gaming system. Lotteries work best when there is no effective way to distinguish among potential users of a scarce resource

Personal Characteristics
Resources are allocated to the people with the right characteristic.

Force
Force provides an effective method of transferring wealth from the rich to the poor, and it provides the legal framework in which voluntary exchange in markets takes place.

Demand and Marginal Benefit

Marginal Benefit
the benefit or the values a person receives from consuming one

more unit of a good or service.

Demand, Willing to pay, and Value we measured marginal benefit by maximum price that is willingly paid for another unit of the good or service. But willingness to pay determines demand. A demand curve is a marginal benefit curve.

Individual demand and market demand

the relation between the price of good and the quantity demanded by one person is called individual demand. the relation between the price of good and the quantity demanded by all buyers are called market demand. the market demand curve is the marginal social benefit (MSB) curve.

Consumer Surplus A consumer surplus is the value or marginal benefit of a good minus the price paid for it, summed over the quantity bought. Difference between maximum amount consumers are willing to pay and the price of a good. We have consumer surplus basically because we pay the same amount for each unit of a commodity that we buy, from the first to the last.

DEMAND AND CONSUMER SURPLUS

Supply and Marginal Cost

Marginal Cost.
increasing marginal cost implies that as more of a good or

service is produced, its marginal cost increases. The minimum price that producers must receive to induce them to offer one more unit of a good or service for sale.

Supply, Cost, and Minimum Supply-Price

Firms make a profit when they receive more from the sale of a good or service than the cost of producting it. Cost is what a producer gives up. Price is what a producer receives. A supply curve is a marginal cost curve.

Individual Supply and Market Supply

Individual supply is the relationship between the price of a good and the quantity supplied by one producer. The market supply curve is the marginal social cost (MSC) curve.

Individual Supply,Market Supply,and Margina Social Cost

Producer Surplus
A producer surplus is the price received for a good minus its minimum supply-price(marginal cost),summed quantity sold. Consumer surplus and producer surplus can be used to measure the efficiency of a market.

Supply and Producer Surplus

Efficiency of Competitive Equilibrium

Efficiency equilibrium occurs when the quantity demanded equals the quantity supplied. Resources are used efficiently when MSB equals MSC. Marginal Social Benefit (MSB) is the marginal benefit to the entire society. The demand curve is also the MSB curve. Marginal Social Cost (MSC) is the marginal cost to the entire society The supply curve is also the MSC curve. When the efficient quantity is produced, total surplus (the sum of consumer surplus and producer surplus) is maximized.

Underproduction and Overproduction

Inefficiency can occur because either too little of an item is produced (underproduction) or too much is produced (overproduction) We measured the scale of inefficiently by deadweight loss, which is the decrease in total surplus that results from an inefficient level of production.

The graph of underproduction and overproduction

Obstacles to Efficiency
The obstacles to efficiency that bring underproduction or overproduction are : Price and Quantity Regulations Price regulations sometimes block the price adjustment that balance the quantity demanded and the quantity supplied and lead to underproduction. Quantity regulations bounding the amount that permitted to produce so leading to underproduction.

Taxes and Subsidies Taxes increase the prices paid by buyers and lower the prices received by sellers. So taxes decrease the quantity produced and lead to underproduction. Subsidies decrease the prices paid by buyers and increase the prices received by sellers. So subsidies increase the quantity produced and lead to overproduction. Externalities An externalities is a cost or a benefit that affects someone other than the seller or the buyer. External Cost is cost that a producer or a consumer imposes on another producer or consumer outside of any market transaction between them. External Benefit is benefit that someone gains because of someone else action, outside of any market transaction between them.

Public Goods and Common Resources A public good is a good or service that is consumed simultaneously by everryone even if they dont pay for it. A common resouce is owned by no one but available to be used by everyone. Monopoly Because the monopoly has no competitors, it can setthe price to achieve its self-interested goal. To achieve its goal, a monopoly produces too little and charges price too high. It leads to underproduction.

High Transactions Costs Transaction costs is the opportunity costs of making trades in a market. When the transactions costs are too high, the market might underproduce.

Is the Competitive market Fair?

There are no universally agreed about fair or fairness When natural disaster strike the price of essential item jump,because the demands and willingness to pay increase and the supply has not changed,Just the buyer with the higher price will get the scarce resource.Same Case when low-skilled people work for a wage just for survive in live many media and politician talk of lowskilled employee taking unfair advantage of their works.

There are two board groups about fairness,they are:

Its not fair if the result isnt fair
Its not fair if the rules arent fair

Its not fair if the result isnt fair

In this boards group we will see principle of fairness based on the view that the result is what matters.The general idea was that unfair if peoples income are too equal Example:its unfair that a General Manager earns thousand million rupiahs a year while a accountant only earn thousand dollar a year

Utilitarianism are the nineteenth century idea that only equality brings eficiency.the principle of Utilitarianism is we should strive to achieve the greatest happiness for the greatest number.some of famous utilitarians are jeremy bentham and john stuart mill

Utilitarianism

The big tradeoff

Recognizing the cost of making income transfers leads to what is called big tradeoff.which is a tradeoff between efficiency and fairness.

Make The Poorest as well off as possible

The New Solution to the big tradeoff problem was proposed by john Rawls in a book A Theory of Justice.Rawls says that,taking all the cost of income transfers into account.The incomes of rich people should be taxed,and after paying the cost of administering the tax and transfer system,what is left should be transfered to the poor.

Its Not Fair if the rules arent fair

The idea of this board group are based on symmetry principle, symmetry principle is the requirement that people in similiar situations be treated similiarly,in economic life this called equality of opportunity.

Fairness and efficiency

If private property rights are enforced and if voluntary exchange takes a place in a competitive market,resource will be allocated efficiently ir there are no: 1.Price quantity regulations 2.taxes and subsidies 3.externalities 4.public goods and common resource 5. monopolies 6.High transactions cost