Unit 2

Question 1

Normative Economics

Answer 1

• What ought to be, what should be
• value based
• focus on ideological, opinion-oriented and prescriptive value judgements of economic issues

Question 2

Positive economics

Answer 2

• what is
• fact based
• focus on description, quantification and explanation of economic issues

Question 3

1st law of thermodynamics

Answer 3

• energy and matter cannot be created or destroyed

- accumulate in the economic system or return to the environment as waste

Question 4

2nd law of thermodynamics (Entropy law)

Answer 4

• entropy increases

- Entropy: the amount of energy in a closed system that is unavailable for work

Question 5

Static Efficiency

Answer 5

• normative economic criterion for choosing among various allocations occurring at the same point in time
• An allocation of resources maximizes the net benefits from those resources
• Total economic surplus = Consumer surplus + producer surplus
• Equilibrium: Demand= supply or MB=MC

Question 6

Dynamic Efficiency

Answer 6

• Normative economic criterion for choosing among various allocations occurring at different points in time
• Dynamic Efficiency criterion maximizes the present value of net benefits

Question 7

Pareto Optimality

Answer 7

A situation is Pareto Optimal if no other feasible allocation could benefit at least one person without any deleterious effects on some other person