Chapter 7 Flashcards
Positive Analysis
an assessment that describes what is happening or predicts what will happen. A purely objective analysis, describing and forecasting the effects of the policy. - Ask “What is going to happen if we adopt this policy?”
Normative Analysis
assesses what should happen. Requires a value judgement about which outcome is better. Ask “Which is the better outcome, and what policy should the government adopt?
Economic surplus
the total benefits minus the total costs flowing from a decision.
An outcome is more economically efficient if
it yields more economic surplus.
The efficient outcome yields the _______ ______ economic surplus.
largest possible
Consumer Surplus
is the economic surplus you get from buying something.
what is the formula for consumer surplus?
Consumer Surplus = Marginal Benefit – Price
Consumer surplus is the area
below the demand curve and above the price.
Producer surplus
is the economic surplus you get from selling something
what is the formula for producer surplus?
Producer Surplus = Price - Marginal Cost
Producer surplus is the area
above the supply curve and below the price.
Efficient Production
is producing a given quantity of output at the lowest possible cost, which requires producing each good at the lowest marginal cost.
Efficient Allocation
is allocating goods to create the largest economic surplus, which requires that each good goes to the person who’ll get the highest marginal benefit from it.
Efficient Quantity
is the quantity that produces the largest possible economic surplus.
Market Failure
occurs when the forces of supply and demand lead to an inefficient outcome.
