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Econ 101 > Econ 101: Chapter 7 > Flashcards

Econ 101: Chapter 7 Flashcards

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1
Q

positive analysis

A

describes what is going to happen; forecasts the effects of the policy

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2
Q

positive analysis involves…

A

a purely objective analysis

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3
Q

normative analysis

A

assesses which is the better outcome, and which policy should be adopted.

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4
Q

normative analysis involves…

A

making a value judgment

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5
Q

efficiency criterion

A

favours the outcome that generates the most economic surplus.

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6
Q

economic surplus measures…

A

the benefits that follow from a decision minus the costs that are incurred.
(total benefits - total cost)

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7
Q

economic efficiency

A

an outcome is more economically efficient if it yields more economic surplus.

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8
Q

efficient outcome

A

yields the largest possible economic surplus.

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9
Q

efficient outcomes…

A

won’t make everyone happy.

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10
Q

economic surplus only rises when…

A

the gains to those helped are larger than the declines in surplus among those that are harmed.

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11
Q

when economic surplus rises, it is possible for…

A

those who benefit to compensate that who were harmed (ensures that everybody is better off)

This is quite rare in practice.

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12
Q

equity

A

assesses whether a policy will yield a fair distribution of economic benefits.

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13
Q

consumer surplus

A

the economic surplus you get from buying something

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14
Q

consumer surplus =

A

marginal benefit - price

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15
Q

consumer surplus describes…

A

the gain you get from buying something at a price below the highest price you are willing to pay.

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16
Q

total consumer surplus is…

A

the area below the demand curve and above the price, out to the quantity sold.

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17
Q

you earn consumer surplus on all but…

A

your last purchase.

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18
Q

producer surplus

A

the economic surplus you get from selling something

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19
Q

producer surplus =

A

price - marginal cost

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20
Q

producer surplus is gained when…

A

you sell something at a higher price than your marginal costs.

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21
Q

total producer surplus is…

A

the area above the supply curve and below the price, out to the quantity sold.

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22
Q

you earn producer surplus on all but…

A

your last sale.

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23
Q

voluntary transactions create…

A

both producer and consumer surplus (cooperation, so both will only trade if they themselves benefit).

24
Q

economic surplus =

A

consumer surplus + producer surplus

OR

marginal benefit - marginal cost

25
Q

total economic surplus is…

A

the area between the demand and supply curves, to the left of the quantity bought and sold.

26
Q

efficient production

A

occurs when we produce a given level of output at the lowest possible cost.

“Who makes what?”

27
Q

efficient production means that…

A

production is allocated so that each item is produced at the lowest marginal cost.

28
Q

Any production plan other than the one caused by the forces of supply and demand will…

A

raise costs.

29
Q

efficient allocation

A

occurs when goods are allocated to create the largest economic surplus.

“Who gets what?”

30
Q

efficient allocation requires…

A

each good to go to the person who gets the highest marginal benefit from it.

31
Q

any allocation plan other than the once caused by the forces of supply and demand will…

A

reduce the total amount of economic surplus.

32
Q

markets allocate goods to those with the…

A

highest marginal benefit.

33
Q

efficient quantity

A

the quantity that produces the largest possible economic surplus.

“How much gets bought and sold?”

34
Q

the quantity that maximizes economic surplus is the…

A

equilibrium quantity.

35
Q

if sellers produce more than the equilibrium quantity…

A

seller’s marginal cost > buyers marginal benefit.

36
Q

if sellers produce less than the equilibrium quantity…

A

buyers marginal benefit > sellers marginal costs

37
Q

all economic activity is directed by…

A

the invisible hand (Adam Smith)

38
Q

market failure

A

when the forces of supply and demand lead to an inefficient outcome

39
Q

Market failure causes:

A

market power, externalities, information problems, irrationality, and government regulations.

40
Q

market power

A

the ability of a firm or group of firms to influence the price of a good or service in the market.

undermines competitive pressures.

41
Q

externalities

A

the unintended side effects of economic activities that affect others who are not directly involved in the transaction (can be positive or negative)

42
Q

information problem

A

Private information - when you’re worried that the folks you’re doing business with know something you don’t.

43
Q

irrationality

A

bad decisions - sometimes people make decisions that aren’t in their best interests.

44
Q

government regulations

A

impede market forces.

Taxes on buying/selling can lead to a lower quantity bought/sold.

sometimes they push the market away from the efficient quantity.

45
Q

deadweight loss

A

how far economic surplus falls below the efficient outcome.

46
Q

deadweight loss =

A

economic surplus at efficient quantity – actual economic surplus

47
Q

when calculating deadweight loss…

A

focus directly on the marginal benefits/costs.

48
Q

market failure makes the demand/supply curves…

A

a poor measure of marginal benefits/costs

49
Q

what creates deadweight loss?

A

producing more, or less than the equilibrium quantity.

50
Q

deadweight loss looks like…

A

an arrow that points towards the efficient quantity.

51
Q

government failure

A

when government policies lead to worse outcomes.

52
Q

critiques of economic efficiency (1):

A

Distribution matters, and so it’s also important to account for equity.

53
Q

critiques of economic efficiency (2):

A

Willingness to pay reflects ability to pay, not just marginal benefit.

54
Q

critiques of economic efficiency (3):

A

The means matter, not just the ends.
- economic efficiency is all about outcome, but the process matters too.

55
Q

distributional consequences

A

who gets what; is that fair/equitable.

Econ 101 (14 decks)

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