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Economics Test 2 Study Guide

Economics Test 2 Study Guide - Welfare Economics-Welfare...

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Welfare Economics - Welfare economics - the study of how the allocation of resources affects economic well being -Essentially, a tradeoff between efficiency and equity - Efficiency - the property of a resource allocation of maximizing total well being of all members of society - Equity - property of fairness of the distribution of well-being among the members of society. A) Measuring Consumer Well-Being a. How Measure? a.i. Consumer surplus- buyer’s willingness to pay minus the amount the buyer actually pays a.ii. Willingness to pay- the maximum amount that a buyer will pay for a good consumer decides how much they are willing to pay b. Consumer Curve b.i. If price falls below P1 consumer surplus increases b.ii. If price rises above P1 Consumer surplus decreases c. Producer Surplus c.i. Definition the amount a seller is paid for a good, minus the seller’s cost c.ii. Cost - the value of everything a seller must give up to produce a good d. Producer Surplus Curve d.i. See Notes d.ii. Point C will participate because it essentially breaks even d.iii. If price falls below P1, Producer surplus decreases e. Total Surplus e.i. Total surplus (total welfare)= Consumer surplus+ producer surplus e.ii. See notebook for curve e.iii. A person cannot do better than what individuals do on their own because they do not have more information thatn the individuals who are participating in the economy f. Does the market maximize total surplus? f.i. Free markets allocate S of goods to buyers who value them most highly (max CS) f.ii. Free markets allocate D goods to sellers who can produce them for least cost (Max PS) f.iii. Free markets produce the Q of goods that Maximize CS+PS g. Markets are a good way to organize economic activities. a.k.a. market equilibrium maximizes total surplus and is efficient when: g.i. Markets are perfectly competitive g.ii. The outcome in a market matters only to the buyers and sellers in the market g.iii. >>>>> If these two assumptions do not hold, market is not efficient and is subject to market failure. What causes market failure? g.iii.1. Monopolies g.iii.2. Externalities i.e. second hand smoke can negatively affect bystanders h. Governments can sometimes influence market outcomes. When?
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h.i. To correct market failure h.ii. To pursue equity goals h.ii.1. Price controls B)
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Economics Test 2 Study Guide - Welfare Economics-Welfare...

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