Econ 101: Chapter 7

Question 1

positive analysis

Answer 1

describes what is going to happen; forecasts the effects of the policy

Question 2

positive analysis involves…

Answer 2

a purely objective analysis

Question 3

normative analysis

Answer 3

assesses which is the better outcome, and which policy should be adopted.

Question 4

normative analysis involves…

Answer 4

making a value judgment

Question 5

efficiency criterion

Answer 5

favours the outcome that generates the most economic surplus.

Question 6

economic surplus measures…

Answer 6

the benefits that follow from a decision minus the costs that are incurred.
(total benefits - total cost)

Question 7

economic efficiency

Answer 7

an outcome is more economically efficient if it yields more economic surplus.

Question 8

efficient outcome

Answer 8

yields the largest possible economic surplus.

Question 9

efficient outcomes…

Answer 9

won’t make everyone happy.

Question 10

economic surplus only rises when…

Answer 10

the gains to those helped are larger than the declines in surplus among those that are harmed.

Question 11

when economic surplus rises, it is possible for…

Answer 11

those who benefit to compensate that who were harmed (ensures that everybody is better off)

This is quite rare in practice.

Question 12

equity

Answer 12

assesses whether a policy will yield a fair distribution of economic benefits.

Question 13

consumer surplus

Answer 13

the economic surplus you get from buying something

Question 14

consumer surplus =

Answer 14

marginal benefit - price

Question 15

consumer surplus describes…

Answer 15

the gain you get from buying something at a price below the highest price you are willing to pay.

Question 16

total consumer surplus is…

Answer 16

the area below the demand curve and above the price, out to the quantity sold.

Question 17

you earn consumer surplus on all but…

Answer 17

your last purchase.

Question 18

producer surplus

Answer 18

the economic surplus you get from selling something

Question 19

producer surplus =

Answer 19

price - marginal cost

Question 20

producer surplus is gained when…

Answer 20

you sell something at a higher price than your marginal costs.

Question 21

total producer surplus is…

Answer 21

the area above the supply curve and below the price, out to the quantity sold.

Question 22

you earn producer surplus on all but…

Answer 22

your last sale.

Question 23

voluntary transactions create…

Answer 23

both producer and consumer surplus (cooperation, so both will only trade if they themselves benefit).

Question 24

economic surplus =

Answer 24

consumer surplus + producer surplus

OR

marginal benefit - marginal cost

Question 25

total economic surplus is...

Answer 25

the area between the demand and supply curves, to the left of the quantity bought and sold.

Question 26

efficient production

Answer 26

occurs when we produce a given level of output at the lowest possible cost. "Who makes what?"

Question 27

efficient production means that...

Answer 27

production is allocated so that each item is produced at the lowest marginal cost.

Question 28

Any production plan other than the one caused by the forces of supply and demand will...

Answer 28

raise costs.

Question 29

efficient allocation

Answer 29

occurs when goods are allocated to create the largest economic surplus. "Who gets what?"

Question 30

efficient allocation requires...

Answer 30

each good to go to the person who gets the highest marginal benefit from it.

Question 31

any allocation plan other than the once caused by the forces of supply and demand will...

Answer 31

reduce the total amount of economic surplus.

Question 32

markets allocate goods to those with the...

Answer 32

highest marginal benefit.

Question 33

efficient quantity

Answer 33

the quantity that produces the largest possible economic surplus. "How much gets bought and sold?"

Question 34

the quantity that maximizes economic surplus is the...

Answer 34

equilibrium quantity.

Question 35

if sellers produce more than the equilibrium quantity...

Answer 35

seller's marginal cost > buyers marginal benefit.

Question 36

if sellers produce less than the equilibrium quantity...

Answer 36

buyers marginal benefit > sellers marginal costs

Question 37

all economic activity is directed by...

Answer 37

the invisible hand (Adam Smith)

Question 38

market failure

Answer 38

when the forces of supply and demand lead to an inefficient outcome

Question 39

Market failure causes:

Answer 39

market power, externalities, information problems, irrationality, and government regulations.

Question 40

market power

Answer 40

the ability of a firm or group of firms to influence the price of a good or service in the market. undermines competitive pressures.

Question 41

externalities

Answer 41

the unintended side effects of economic activities that affect others who are not directly involved in the transaction (can be positive or negative)

Question 42

information problem

Answer 42

Private information - when you’re worried that the folks you’re doing business with know something you don’t.

Question 43

irrationality

Answer 43

bad decisions - sometimes people make decisions that aren’t in their best interests.

Question 44

government regulations

Answer 44

impede market forces. Taxes on buying/selling can lead to a lower quantity bought/sold. sometimes they push the market away from the efficient quantity.

Question 45

deadweight loss

Answer 45

how far economic surplus falls below the efficient outcome.

Question 46

deadweight loss =

Answer 46

economic surplus at efficient quantity – actual economic surplus

Question 47

when calculating deadweight loss...

Answer 47

focus directly on the marginal benefits/costs.

Question 48

market failure makes the demand/supply curves...

Answer 48

a poor measure of marginal benefits/costs

Question 49

what creates deadweight loss?

Answer 49

producing more, or less than the equilibrium quantity.

Question 50

deadweight loss looks like...

Answer 50

an arrow that points towards the efficient quantity.

Question 51

government failure

Answer 51

when government policies lead to worse outcomes.

Question 52

critiques of economic efficiency (1):

Answer 52

Distribution matters, and so it’s also important to account for equity.

Question 53

critiques of economic efficiency (2):

Answer 53

Willingness to pay reflects ability to pay, not just marginal benefit.

Question 54

critiques of economic efficiency (3):

Answer 54

The means matter, not just the ends. - economic efficiency is all about outcome, but the process matters too.

Question 55

distributional consequences

Answer 55

who gets what; is that fair/equitable.