Unit 1 Flashcards
what is normative economics
economic analysis that assesses the goodness or desirability of the policy outcomes
why is the way economists conduct normative economics controversial
the ethical assumptions used to judge distrutbion of things like cars can be quite different than the ethical assumptions used to judge allocations of health care
what are the three concepts of efficiency
technical efficiency, cost-effectiveness efficiency, and allocative efficiency
what are the two types of equity analysis
distributional equity and procedural equity
what is opportunity cost
the opportunity cost of using a resource for one purpose is the benefits forgone from the highest valued alternative use
what does opportunity cost emphasize
the true social cost of an action or a policy is not associated with financial expenditures
what is technical efficiency
does not waste resources when producing a good
what is cost effectiveness efficiency
produce each good using the lowest cost mix of resources
what is allocative efficiency
calls to society to produce the goods and services that people value the most
what is efficiency
in essence is about getting as much as possible from scarce resources
what does the amount of output produced depend on
technology available and the quantity and quality of inputs
what is the production function
the relationship between inputs and outputs
what is indicated by the production function
the maximum amount of output that can be produced from a given set of inputs
what is maximized by technical efficiency
the output for the given inputs
what question is asked to assess if a production method is technically efficient
is it possible to get more output with the same inputs
what does cost effectiveness require
that among all technically efficient methods, the lowest-cost production method is chosen
what is identified by the production possibilities factor
the combinations of health care and houses that the society can produce if it uses its resources in a technically and cost effectively efficient manner
what do the points on the PPF represent
technically efficient production
what do the points inside the curve of PPF represent
technically inefficient production
what does allocative efficiency require
that society produce and distribute goods and services in accord with the value that individuals place on those goods and services
what is utility
the subjective satisfaction an individual derives from consuming a good or undertaking an activity
what is the level of utility a measure of
the benefit derived from a particular resource allocation
what does the Pareto criterion declare
allocation to be allocatively efficient
how does the Pareto criterion declare allocation to be allocatively efficient
if it is impossible to reallocate resources in a way that makes at least one person better off without making someone else worse off
what do all points on the grand utility possibilities frontier represent
possibilities that are allocatively efficient
what is the goal of the potential Pareto criterion
it seeks to allocate resources to maximize net benefit to society
how is net benefit defined in the potential Pareto criterion
net benefit is defined as total benefits minus total costs
what is the concept of allocative efficiency
social benefit
what is the objective of technical efficiency and cost effectiveness efficiency
the production of a good
what does maximizing behaviour depend on
marginal analysis
what does marginal analysis do
it identifies the optimal level of a good or activity
how does marginal analysis identify optimal level of a good
by continually asking what happens if we do something just a little bit more or just a little bit less
what is the use of efficency normatively
to judge the desirability of an allocation of resources
what is the concern of equity
fairness
what is assessed by equity analysis
whether a particular allocation of resource is fair
what are the two types of equity
distributional equity and procedural equity
what does distributional equity define
the good of concern, what constitutes a fair distribution of the good, and the amount of the good each member of society has with the characteristics of each individual
what is asked by procedural equity
if the process is fair
what occurs from procedural equity
it shifts the focus from the actual distribution of a good to the process by which a good is allocated
what does assessing distributional equity require
an agreement regarding the thing whose distribution is of equity concern, the characteristics of individuals judged relevant to assessing a fair distribution of the good, and a definition of how the distrubition of that characteristic among individual corresponds to a fair distribution of the good among individuals
what is the good of concern for distributional equity in the healthcare sector
health care itself, access to healthcare, health, or the burden of paying for health care
what is the characteristic relevant to a fair distribution
the feature that determines how much of the good a person should get under a fair distribution
what are the two criteria used to assess distribution
horizontal equity and vertical equity
what is required by horizontal equity
that individuals who are equal with respect to their equity relevant characteristics receive equal amounts of the good
what does horizontal equity demand
that two individuals with equal ability to pay/contribute equally to finance health care
what is required by vertical equity
that those who are unequal with respect to their equity relevant characteristic receive appropriately unequal amounts of the good
what is the central challenge of vertical equity
how to define how much differently unequals should be treated
what does procedural equity concern
the fairness of the process by which resources are allocated
when is procedural equity used
in situations where the analysis of distributional equity is not possible
describe when distributional equity is not possible
when we cannot observe one or both of the good and the equity relevant characteristic of individuals, making it impossible to compare how the two distributions correspond
what is required to achieve greater efficiency
society may have to sacrifice some equity
what does economics capture in regards to social welfare function
represents society’s preferences and attitudes toward the amount and distribution of welfare in society
what is the two primary criteria for assessing allocative efficiency
the Pareto criterion and the potential Pareto criterion
does efficiency and equity conflict with one another?
they can, but do not necessarily conflict
what are the three kinds of conditions are necessary for market allocation to be efficient
conditions in the broader environment in which a market operates, ethical principles consistent with the judgement that a person’s willingness to pay represents the social value of a good or service, technical conditions within the market itself
when do markets function well
only when surrounded by external institutions that support market exchange
what do markets require
a well functioning legal system that can define, adjudicate, and enforce property rights
how do markets allocate resources
on the basis of willingness to pay
what does a persons willingness to pay depend on
their ability to pay, which in turn depends on their income or wealth
what are the three basic conditions required for a market allocation t be efficient
an absence of market power on both the demand and supply side, adequate information for both purchasers and producers to make good decisions, and absence of externalities
what does market power imply
an ability to influence the market price
what is an monopoly
a market that only has a single producer
what is government regulation of market power do
it inhibits market competition
what is asymmetry of information
a source of market power
why is asymmetry of information a source of market power
because sellers have considerable scope to exploit their informational advantage to influence the demand for their own services for their own economic gain
how do externalities affect markets
they cause markets to allocate resources inefficiently
when does market failure occur
when one or more of the necessary conditions is violated, an unregulated market fails to generate an efficient allocation of resources
what logic does economic policy analysis rest on
a principal economic goal is the efficient allocation of society’s resources
what is provided by the economic model of consumer choice and demand
formal framework which to analyze how these and other factors affect demand for goods and services
what does the economic model of consumer choice and demand emphasize
what people care about, the goal they are trying to achieve through their choices, the constraints they face when making a choice
what is the consumer’s choice problem
given the market prices for goods and a person’s preferences and income, how should a person allocate their income so as to maximize utility
what is diminishing marginal utility
consuming more of a good increases utility, but at a diminishing rate
what is the income effect
the higher income causes the person to increase consumption
why is the demand curve negatively sloped
because of diminishing marginal utility
explain why the demand curve is negatively sloped
the maximum amount that a person is willing to pay decreases as quantity consumed increases; the quantity demanded increases as price falls
what is an elasticity measure
the ratio of the percentage change in the determined variable to the percentage change in the determining variable
what is own price elasticity measure do
measures the responsiveness of the quantity demanded for a good to changes in its own price
what does income elasticity of demand measure
measures the responsiveness of the demand for a good to changes in income
what are the characteristics of inelasticity
price insensitive, and occurs when the absolute value is less than 1
when does unitary elasticity occur
when the absolute value of price elasticity equals 1
what does elasticity occur
when the absolute value of the price-elasticity is greater than 1
what is referred to as inferior goods
goods whose quantity demanded falls as income rises
what is referred to as normal goods
goods whose quantity demand grows as income rises
what does the elasticity of demand for a good depend on
the time period under consideration
what is market demand
the sum of the individual demands of those participating in the market
what is producer’s total revenue equal to
the price of the good multiplied by the number of units the producer sells
what is price determined by
the market
what are production cost determined by
the prices of inputs
what are diminishing marginal returns
when additional units of one input are added while holding constant the amounts of all other inputs, beyond a point the marginal output of each additional unit of the input falls
what is a market comprised of
demand and supply
what is a market equilibrium
once the market reaches this price-quantity combination, there will not be tendency for price or output to change unless one of the determinants of demand or supply changes
if there are no externalities in consumption, what does marginal private benefit equal
marginal social benefit
what is the supply curve also known as
the producer’s marginal cost curve
what is the net benefit to society defined as
the total benefit generated by the consumption minus the total social cost of its production
what is the consumer’s surplus
the area above the equilibrium price line and below the demand curve which is the measure of the benefit that accrues to consumers
what is the producer’s surplus
the area below the equilibrium price line but above the supply curve
what is monopolistic competition
a market with many producers, each selling a slightly differentiated version of a good or service
what is oligopolistic competition
a market with a small number of large producers, each of which holds a substantial proportion of the market
when does market failure occur
when one or more of the conditions set out in equation do not hold
what is the market equation
MSB = MPB = P* = MPC = MSC
what creates welfare losses and inefficiencies
policies that distort prices
