Welfare & Efficiency Flashcards
What is positive analysis?
describes what is happening
What is normative analysis?
involves a value judgement
What outcome does the efficiency criterion favour?
The outcome that yields the most economic surplus
What is economic surplus?
Total benefits - total costs
What is economic efficiency?
The more economic surplus that’s generated, the more efficient the outcome
What is an efficient outcome?
Yields the largest possible economic surplus
What is consumer surplus? + formula
Diff between the price you were willing to pay and the price you actually pay. Marginal Benefit - Price. Below demand curve above price
What is producer surplus? + formula
Diff between the price they are willing to accept for a good/or service and the price they accept. Price - Marginal cost. Above supply curve below price
What is voluntary exchange?
Buyers and sellers exchange money for goods only if they both want. Ensurers both buyers and sellers enjoy gains from trade
Rational rule formula
MB = MC
What is efficient production?
Producing a given quantity of output at lowest possible cost
What is efficient allocation?
Allocating goods to create the largest economic surplus
What is efficient quantity?
Produces the largest possible economic surplus
What is market failure?
Occurs when the market fails to allocate scare resources efficiently causing a loss in social welfare loss
5 types of market failure
Market/monopolistic power, externalities, information problems, irrationality, gov regulations
