Chapter 4

Question 1

What is welfare economics?

Answer 1

• the study of how allocation of resources affects economics well-being

Question 2

What is Subjective and objective well-being?

Answer 2

• subjective well-being describes people evaluating own happiness
• objective well-being descirbes using indicators for the quality of life, developed by researchers

Question 3

What is Allocative Efificiency?

1.
2.
3.

Answer 3

• resource allocation where the value of the output by sellers matches the value placed on that output by buyers
• optimal distribution of goofd or services, consumer preferences taken into account
• buyers/ sellers get benefits from taking part in the market

Question 4

How can we determine the consumer surplus?

Answer 4

buyers willingness to pay - amount he actually pays

Question 5

Is the allocation of resources determined by free markets in any way desirable?

Answer 5

• in theory, free markets tend to not have long term vast shortages and surpluses
• consumers and producers change their behaviour which moves the market to equilibrium because of incentives

Question 6

What is a bargaining process?

Answer 6

• finding an agreed outcome between two interested and competing agents
• price can be seen as bargaining tool

Question 7

What is the General Equilibrium?

1.
2.
3.

Answer 7

• it is the notion that the decisions and choices of economic agents are coordinated across markets
• market mechanism lead to efficient outcomes
• consumers are maximizing utility and producers are maximizing profits at minimum average cost

Question 8

How can we deal with watse?

Answer 8

• find a way to re-allocate resources to reduce that waste
• consumers adjusting buying habits and producers adjusting production methods

Question 9

What is the social suprlus?

Answer 9

sum of all consumer and producer surplus

Question 10

What is Pareto efficiency?

Answer 10

• no one can be made better off without making someone else worse off

Question 11

What is….

1. an efficient outcome?
2. an inefficient outcome?

Answer 11

1. an outcome is efficient if we cannot find a universally, non-harmful way to re-allocate
2. an outcome is inefficient if we can find a way!

finding the way would be a Pareto improvement

we can re-allocate until such an improvement is no longer possible and maximung social welfare is reached

Question 12

What does the “Invsisible Hand” do?

1.
2.

Answer 12

• re-allocate and adjust consumers and producers behaviour to maximize social welfare
• guides managers to pursue self-interst which leads to most efficient outcomes

Question 13

What makes a total surplus in a market?

Answer 13

the total area between suppy and deand curves up to the point of equilibrium

Question 14

What is the definition of Efficiency?

Answer 14

• the property of a resource allocation of maximizing the total surplus received by all members of society

Question 15

Three insights concerning market outcomes…

1.
2.
3.

Answer 15

• free markets allocate the supply of goods to the buyers who value them the most highly as measured by their willingeness to pay
• free markets allocate the demand for goods to the sellers who can produce them at the least cost
• free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus