Chapter 2 Content Flashcards
What do theoretical tools help understand?
How economic decisions are made.
What do empirical tools analyze?
Data to test economic theories.
What is constrained utility maximization?
Individuals make choices based on preferences and budget constraints to maximize their utility.
What do indifference curves represent?
Different combinations of goods that provide the same satisfaction.
What limits what individuals can consume?
Budget constraints based on income and prices of goods.
What is the substitution effect?
When a good becomes more expensive, people buy less of it and more of alternatives.
What is the income effect?
Higher prices make people effectively poorer, reducing overall consumption.
What happens to demand for normal goods when income rises?
Demand increases.
What happens to demand for inferior goods when income rises?
Demand decreases.
What does TANF stand for?
Temporary Assistance for Needy Families.
How does TANF affect work incentives?
It reduces benefits as earnings increase, creating a trade-off between work and leisure.
What do benefit reduction rates influence?
Whether recipients choose to work more or rely on assistance.
What do demand curves show?
How much of a good consumers will buy at different prices.
What do supply curves show?
How much firms will produce at different prices.
What occurs at market equilibrium?
Supply meets demand, maximizing social efficiency.
What is consumer surplus?
Extra benefit consumers get when they pay less than they are willing to.
What is producer surplus?
Extra revenue firms get above their production costs.
What does the First Fundamental Theorem of Welfare Economics state?
Market equilibrium maximizes efficiency.
What does the Second Fundamental Theorem of Welfare Economics suggest?
Redistribution can achieve fairness without sacrificing efficiency, but it’s hard to implement.
What is commodity egalitarianism?
Government ensures basic needs but not equal income.
What is equality of opportunity?
Everyone gets the same chance to succeed, but outcomes can be unequal.
What is the impact of reducing TANF benefits on efficiency?
Increases efficiency as more people work.
What is a potential downside of reducing TANF benefits?
May reduce overall social welfare due to fewer resources for those in need.
What must policymakers weigh in relation to TANF?
Economic efficiency against social fairness.
True or False: Price changes affect consumption through substitution and income effects.
True
Fill in the blank: The trade-off between efficiency and equity is often referred to as the _______.
Equity vs. Efficiency Trade-Off
What can complicate the understanding of consumer and producer surplus?
How they determine economic benefits.
What is a key point regarding TANF and work incentives?
Benefit reductions affect labor supply.
