Normative properties Flashcards
What is a welfare analysis?
Resources are allocated efficiently or not
What is consumer surplus?
The difference between the price consumers are willing and able to pay for a good and what they actually pay
- usually below demand curve and above price line
What is producer surplus?
The difference between the price producers are willing and able to supply and the price they actually receive
- usually above supply and below price line
What is society’s surplus?
Consumer surplus + Producer surplus
What are interrelated markets?
Joint demand, complements
e.g Razor + blades, printer + ink
How to show interrelated markets on graphs?
Price and quanity of one
and then next to it the price and quanity of other
What is competitive demand?
Substitutes, increased competition
e.g Coke + pepsi, Iphone+ galaxy
What is derived demand?
Input demand
e/g holiday+ Airtime travel, Cars+ allumin
- both increase
What is Composite demand?
2 goods that require the same input therefore increase production of one leads to decrease supply in other
e.g Cheese + butter = milk
Bread + livestock = wheat
What is joint supply?
Increased production of one good leads to increased supply of other
e.g honey+ beeswax, Crude oil + petroleum
What does price elasticity of demand measure?
PED
The responsiveness of quantity demanded given a change in price
How to work out the price elasticity of demand?
percentage change in quanity demanded/ perchange change in price
What is the Law of Demand
That price elasity of demand is always negative
When is demand elastic?
If greater than 1
- Any price change, there is a grater proportional change in quantity demanded
When is demand inelastic?
Less than 1
- when price change, quanity demanded will change but less t
What does 0 mean for PED?
Demand is perfectly inelastic so no change
What are the 3 social welfare functions?
- Utilitarian
- Weighted
- Rawlsian
What is Utiliarian social welfare?
Social welfare sum up everyones utility and weighing this equally
e.g allocations - 3 roommates, 21 meals and 1 kitchen, could do 7 = or 10,10 an 1
Negative of utilitarian social welfare
Doesn’t consider inequality, some people are worse off
What is weighted social welfare?
Can add different weights based on importance
What is Rawlsian social welfare?
Looks at only 1 person’s utility, one whos worse off
- ‘brings up the bottom’
What is Utility?
The usefulness/ enjoyment a consumer gets from service or good
What does a welfare analysis achieve?
To see if resources have been allocated efficently or not
What is the Utilitarian welfare criterion?
Optimal societal outcome maximises sum of individual welfares
- identifying stakeholders, finding individual welfare, then plus the overall welfare
What is market equilibrium?
Price that clears the market as people are willing to pay is = to supply
What is deadweight loss?
Reduction of society surplus
Units that should/ not be produced
How to find DWL?
Find Marginal benefit than marginal costs and equilibrium point
What is the first welfare theorem?
A perfectly competitive equilibrium maximises social welfare, as production and consumption are at optimal levels without DWL
What is the second welfare theorem?
Any efficient outcome can be achieved through competitive prices, provided surplus are appropriately redistributed before transactions
What is central planning systems?
Government decisions over market meaning they can’t efficiently respond to supply and demand
What does competitive equilibrium allocate?
Resources under perfect competition, achieveing equity requires redistribution without price change (ALLOCATIVE EFFICIENTLy) without price changing
Applications for DWL
- Exercise taxes = introduce DWL by reducing consumer and producer surplus, as this surplus to govenment revenue
- Price support = policies to maintain price equilibrim
- Price floors - restrict price below certain threshholds kleading to rationality
