ECON: Chapter 7 Welfare and Efficiency Flashcards

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Questions and Answers

What does positive analysis describe?

What is happening (correct)

What the government should adopt

What might happen (correct)

What should happen

What is the question to ask with positive policy analysis?

What is going to happen if we adopt this policy?

What does normative analysis prescribe?

What should happen (correct)

What might happen

What the government should adopt

What is happening

What is the question to ask with normative policy analysis?

Which is the better outcome, and what policy should the government adopt? Signup and view all the answers

What does economic efficiency mean?

An outcome is more economically efficient if it yields more economic surplus. Signup and view all the answers

What is an efficient outcome?

Yields the largest possible economic surplus. Signup and view all the answers

What is equity in economic terms?

An outcome that yields greater equity if it results in a fairer distribution of economic benefits. Signup and view all the answers

What is consumer surplus?

The economic surplus you get from buying something. Signup and view all the answers

How is total consumer surplus divided on a graph?

Into a rectangle representing the amount spent and a triangle representing the difference between total consumer value and expenditure. Signup and view all the answers

What is producer surplus?

The economic surplus you get from selling something. Signup and view all the answers

How do you gain producer surplus?

By selling something at a higher price than the marginal costs you incur. Signup and view all the answers

What are the two ways to think of producer surplus?

<ol> <li>The difference between revenue and minimum acceptable price; 2) The part of revenue available to cover fixed costs and profit.</li> </ol> Signup and view all the answers

What is voluntary exchange?

Buyers and sellers exchange money for goods only if they both want to. Signup and view all the answers

Who gains from trade in a voluntary exchange?

Both the buyer and seller. Signup and view all the answers

What are the two ways total value can be added?

<ol> <li>Innovations that increase product value; 2) Innovations that reduce production costs.</li> </ol> Signup and view all the answers

What is efficient production?

Producing a given quantity of output at the lowest possible cost. Signup and view all the answers

What is efficient allocation?

Allocating goods to create the largest economic surplus. Signup and view all the answers

What is efficient quantity?

The quantity that produces the largest possible economic surplus. Signup and view all the answers

To increase economic surplus, you need to?

Produce more of a good if its marginal benefit is greater (or equal to) the marginal cost. Signup and view all the answers

When does market failure occur?

When the forces of supply and demand lead to an inefficient outcome. Signup and view all the answers

What are the five sources of market failure?

<ol> <li>Market power; 2) Externalities; 3) Information problems; 4) Irrationality; 5) Government regulations.</li> </ol> Signup and view all the answers

What is deadweight loss?

How far economic surplus falls below the efficient outcome. Signup and view all the answers

What do economic surplus and deadweight loss focus on?

Marginal benefits and marginal costs. Signup and view all the answers

What creates deadweight loss more, quantities or prices?

Quantities. Signup and view all the answers

What is government failure?

When government policies lead to worse outcomes. Signup and view all the answers

How does government failure limit reliance on government?

It limits the extent to which we should rely on government. Signup and view all the answers

Study Notes

Positive and Normative Analysis

Positive analysis describes current situations, explaining phenomena and predicting future outcomes.
Important question in positive policy analysis: What will happen if we implement this policy?
Normative analysis prescribes ideal outcomes, incorporating value judgments about what should occur.
Key inquiry in normative policy analysis: Which outcome is preferable, and what policies should be adopted?

Economic Efficiency and Surplus

Economic efficiency occurs when an outcome maximizes economic surplus, assessed by whether surplus increases.
An efficient outcome generates the largest potential economic surplus, balancing consumer and producer needs.
Equity refers to fair distribution of economic benefits, aiming for increased fairness in outcomes.

Consumer and Producer Surplus

Consumer surplus is defined as the difference between the maximum price consumers are willing to pay and the actual price paid.
Total consumer surplus on a graph includes the rectangle (expenditure) and triangle (surplus).
Producer surplus is the surplus received from selling goods, calculated by the difference between marginal cost and selling price.
Producer surplus perspectives include revenue minus the minimum acceptable price for additional units and revenue available for covering costs and profits.

Voluntary Exchange and Trade

Voluntary exchange occurs when buyers and sellers willingly trade money for goods, benefitting both parties.
Trade generates value mainly through innovations that enhance product value or reduce production costs.

Efficiency in Production and Allocation

Efficient production entails achieving output at the lowest possible cost, minimizing marginal costs for each good.
Efficient allocation focuses on distributing goods to maximize economic surplus, ensuring goods reach those with the highest marginal utility.
Efficient quantity is identified as the level of production yielding the greatest economic surplus.

Economic Surplus and Market Failures

Economic surplus is maximized when marginal benefit equals marginal cost; increasing output is desirable when marginal benefit equals or exceeds marginal cost.
Market failure happens when supply and demand lead to inefficient outcomes, with five main sources:
- Market power
- Externalities
- Information problems
- Irrationality
- Government regulations
Deadweight loss quantifies the extent economic surplus is below the efficient outcome, represented by loss at efficient quantity versus actual surplus.
Both economic surplus and deadweight loss analyze marginal benefits and costs, with quantities creating more deadweight loss than prices.

Government Intervention and Failures

Government failure refers to instances where interventions worsen outcomes, questioning the reliance on government solutions.

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Test your knowledge with these flashcards covering key concepts from Chapter 7 on Welfare and Efficiency in Economics. Each card focuses on items crucial for understanding positive and normative analysis, offering definitions and implications for policy. Ideal for students looking to solidify their grasp of economic analyses.