4. Chapter 7 Flashcards
What is a positive analysis compared to a normal analysis?
Positive- what is
Normative- what should be
What is welfare economics?
The study of how the allocation of resources affects economic well being
What is the willingness to pay?
Who is the marginal buyer?
Who is the marginal seller?
The maximum amount that a buyer will pay for a good
The marginal buyer is the buyer who would leave the market first if the price was raised any higher
The marginal seller is the seller who would leave the market first is the price was any lower
What is consumer surplus?
A buyers willingness to pay minus the amount the buyer actually pays
John is willing to pay 100 for an Elvis CD but bids up to 80 so his consumer surplus is 20
Value to buyers-amount paid by buyers
How does the demand curve relate to the consumer surplus?
How is it related to the producer surplus?
The are below the demand curve and above the price measures the consumer surplus in the market
Page 142-143 figures
The area below the price and above the supply curve measures the producer surplus in a market
Page 147 figures
What is cost?
The value of everything a seller must give up to produce a good
What is producer surplus?
The amount a seller is paid for a good minus the sellers cost
Grandma is paid 600 to paint a fence when all it costed her was 500
Her producer surplus is 100
Graph on page 145
Amount received by sellers-cost to sellers
Who is the benevolent social planner?
A hypothetical character that is an all knowing, all powerful, well intentioned, dictator
It wants to maximize the economic well being of if everyone in a society
Measures economic well being by calculating the total surplus (consumer surplus + producer surplus)
Does not need to intervene (let people to as they will)
What is the total surplus and how do you find it?
Sum of consumer surplus and consumer surplus
Total surplus= value to buyers-cost to sellers
Page 148 derivation
Page 149 graph
What is efficiency and equity?
Efficiency- the property of a resource allocation of maximizing the total surplus received by all members of society
Equity- the fairness of the distribution of well-being among the members of society
Efficiency is making sure the pie is as big as possible and equity is how equally the pie is divided
What are the three insights on market outcomes?
- Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay
- Free markets allocate the demand for goods to the sellers who can produce them at the lowest cost
- Free markets produce the quantity of goods that maximizes the sum of consumer and procure surplus
Page 150 graph
What is Adam Smith’s invisible hand?
Takes all information about buyers and sellers into account and guides everyone in the market to the best outcome as judged by the standard of economic efficiency
What are externalities?
Side effects the market exhibits that causes the welfare implications of market activity to depend more than just the value to the buyers and the cost to sellers
Pollution, use of agricultural pesticides
What is market failure?
The inability of some unregulated markets to allocate resources efficiently
