Normative properties

Question 1

What is a welfare analysis?

Answer 1

Resources are allocated efficiently or not

Question 2

What is consumer surplus?

Answer 2

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

Question 3

What is producer surplus?

Answer 3

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

Question 4

What is society’s surplus?

Answer 4

Consumer surplus + Producer surplus

Question 5

What are interrelated markets?

Answer 5

Joint demand, complements
e.g Razor + blades, printer + ink

Question 6

How to show interrelated markets on graphs?

Answer 6

Price and quanity of one
and then next to it the price and quanity of other

Question 7

What is competitive demand?

Answer 7

Substitutes, increased competition
e.g Coke + pepsi, Iphone+ galaxy

Question 8

What is derived demand?

Answer 8

Input demand
e/g holiday+ Airtime travel, Cars+ allumin
- both increase

Question 9

What is Composite demand?

Answer 9

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

Question 10

What is joint supply?

Answer 10

Increased production of one good leads to increased supply of other
e.g honey+ beeswax, Crude oil + petroleum

Question 11

What does price elasticity of demand measure?

Answer 11

PED
The responsiveness of quantity demanded given a change in price

Question 12

How to work out the price elasticity of demand?

Answer 12

percentage change in quanity demanded/ perchange change in price

Question 13

What is the Law of Demand

Answer 13

That price elasity of demand is always negative

Question 14

When is demand elastic?

Answer 14

If greater than 1
- Any price change, there is a grater proportional change in quantity demanded

Question 15

When is demand inelastic?

Answer 15

Less than 1
- when price change, quanity demanded will change but less t

Question 16

What does 0 mean for PED?

Answer 16

Demand is perfectly inelastic so no change

Question 17

What are the 3 social welfare functions?

Answer 17

1. Utilitarian
2. Weighted
3. Rawlsian

Question 18

What is Utiliarian social welfare?

Answer 18

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

Question 19

Negative of utilitarian social welfare

Answer 19

Doesn’t consider inequality, some people are worse off

Question 20

What is weighted social welfare?

Answer 20

Can add different weights based on importance

Question 21

What is Rawlsian social welfare?

Answer 21

Looks at only 1 person’s utility, one whos worse off
- ‘brings up the bottom’

Question 22

What is Utility?

Answer 22

The usefulness/ enjoyment a consumer gets from service or good

Question 23

What does a welfare analysis achieve?

Answer 23

To see if resources have been allocated efficently or not

Question 24

What is the Utilitarian welfare criterion?

Answer 24

Optimal societal outcome maximises sum of individual welfares
- identifying stakeholders, finding individual welfare, then plus the overall welfare

Question 25

What is market equilibrium?

Answer 25

Price that clears the market as people are willing to pay is = to supply

Question 26

What is deadweight loss?

Answer 26

Reduction of society surplus
Units that should/ not be produced

Question 27

How to find DWL?

Answer 27

Find Marginal benefit than marginal costs and equilibrium point

Question 28

What is the first welfare theorem?

Answer 28

A perfectly competitive equilibrium maximises social welfare, as production and consumption are at optimal levels without DWL

Question 29

What is the second welfare theorem?

Answer 29

Any efficient outcome can be achieved through competitive prices, provided surplus are appropriately redistributed before transactions

Question 30

What is central planning systems?

Answer 30

Government decisions over market meaning they can’t efficiently respond to supply and demand

Question 31

What does competitive equilibrium allocate?

Answer 31

Resources under perfect competition, achieveing equity requires redistribution without price change (ALLOCATIVE EFFICIENTLy) without price changing

Question 32

Applications for DWL

Answer 32

• 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