Chapter 3 Flashcards
Smith’s concept of the _____ is a powerful metaphor that encapsulates the idea that self-interested
behavior in a competitive market can lead to beneficial outcomes for society as a whole.
“invisible hand”
A British economist defined economics as the “study of mankind in the ordinary business
of life.” He argued that economics is concerned with the material conditions that influence people’s well
being and focuses on how individuals and societies allocate resources to meet their needs and desires.
Alfred Marshall,
is a branch of microeconomics that analyzes the allocation of resources and
goods to improve the overall well-being or welfare of society.
welfare economics
is to evaluate economic policies in terms of how they affect social
welfare, with a focus on maximizing the utility or satisfaction of individuals within an economy.
welfare economics
This states that if the economy or market is competitive (any
competitive equilibrium, it is Pareto efficient.
First Fundamental Theorem.
This refers to a state in a market where supply equals demand, and
there are many buyers and sellers such that no single participant can influence the market price.
Competitive equilibrium.
A resource allocation is _______ if no individual can be made better off
without making someone else worse off.
Pareto efficiency.
It states that any Pareto-efficient allocation can be achieved
through a competitive market mechanism, with the appropriate initial redistributions.
Second Fundamental Theorem.
Pareto Efficiency (also known as
Pareto Optimality)
refers to
an allocation of resources in which no one can be made better off without making someone else worse off.
Pareto efficiency
A _____happens when a change in
allocation benefits at least one individual without making anyone else worse off.
Pareto improvement
And as Stiglitz & Rosengard
(2015) emphasized that any improvements should be instituted is referred to as the ___
Pareto principle.
A ______ is one in which a large number of buyers and
sellers interact in a way that no single participant can influence the market price.
competitive market or a perfectly competitive market
Characteristics of competitive market
Numerous sellers and buyers.
Homogenous products.
Perfect Information
No barriers to entry and exit.
is the allocation of resources in such a way that the goods and services produced are
those most desired by society.
Allocative efficiency
occurs when goods and services are produced at the lowest possible cost
Productive efficiency
is achieved when the
marginal rate of substitution between any two goods must be the same for all individuals.
Exchange efficiency
is achieved when
the marginal rate of technical substitution between any two inputs must be the same for all firms.
Production efficiency
is
achieved when the marginal rate of transformation must equal the marginal rate of substitution.
Product mix efficiency
The _____ traces out the maximum level of utility that may be
achieved by two consumers.
utility possibilities curve
concerns the distribution of goods.
Exchange efficiency
That is, whatever goods are produced have to
go to the individuals who value them most. If I like chocolate ice cream and you like vanilla ice cream,
I should get the chocolate cone and you the vanilla.
The economy must achieve exchange efficiency.
Given society’s resources, the production of one good cannot
be increased without decreasing the production of another.
There must be production efficiency.
The _______is a graphical model that illustrates the combinations of output that
the economy can efficiently produce using the available quantity of economic resources
Production Possibilities Frontier (PPF)
