CH 7 Flashcards
positive analysis
describes what’s going to happen if the policy is adopted
normative analysis
assesses what should happen
economic efficiency
more economic surplus means the better the outcome
economic surplus =
marginal benefit - marginal cost
efficient outcome
yields largest possible economic surplus
equity
assessing whether a policy will yield a fair distribution of economic benefits
consumer surplus
when you gain economic surplus from buying something
producer surplus
when you get economic surplus from selling something
voluntary exchange
where buyers and sellers only exchange goods if they want to
efficient production
minimizes cost
efficient allocation
maximizes benefits, when goods are allocated to create the largest economic surplus for them
efficient quantity
quantity that produces the most economic surplus
rational rule for markets
to increase economic surplus, produce more of an item if the marginal benefit of one more is greater than/equal to the marginal cost
market failure
occurs when the forces of supply and demand lead to inefficient outcomes
five sources of market failure
market power undermines competitive pressures, externalities create side effects, information problems undermine trust, irrationality leads to bad decisions, government regulations impede market forces
deadweight loss
the difference between the largest possible economic surplus at efficient quantity and the actual level of surplus
government failure
when government policy leads to worse outcomes
distributional consequences
who gets what; assess if it’s fair/equal
Real-world markets do not always yield efficient outcomes, since real markets do not always involve well-informed buyers and sellers _____ in a well-functioning market with _____ competition.
interacting; perfect
If you consider yourself a supplier of labor, where the price you charge is your hourly wage, how can you determine your marginal cost?
by applying the opportunity cost principle
