Intro to Economics

Economic efficiency

Dead weight Loss

Market Failure

Economic Efficiency

When no Pareto improvements are possible

Pareto Improvement

Rearranging production or allocation in a way that makes at least 1 person better off

The characteristics of Productive Efficiency

1. Productive efficiency 

2. Allocative efficiency

Productive efficiency 

All resources are fully employed, and all firms are operating at LRATC. 

Productive efficient economy’s resources are allocated between…

Resources are allocated between firms so that we can’t reallocate them to yield more w/o reducing the output of another

Allocative efficiency

• When the optimal distribution of goods in an economy meets the needs and wants of society

the goal of Allocative efficiency

• The goal of allocative efficiency is to ensure that resources are used so that their marginal benefit to society is equal to their marginal cost.

Economic surplus of another unit (formula)

MB-MC

Total surplus formula

PS + CS

Perfect Competition tends to produce…

Tends to produce economically efficient outcomes 

Perfect competition

The market structure where there are no monopolies and many sellers compete to offer the best prices. large sellers have no advantages over smaller ones 

market failures

Situations in conditions where the market produces inefficient outcomes for society 

Rationality is preferences that satisfy which 2 conditions…

1. Any 2 alternatives can be compared and 1 is preferred 

2. The comparisons are logically consistent/transitive 

Rationality

 individuals make decisions based on a rational process of weighing costs and benefits to maximize their own self-interest

Consumer theory

consumer theory shows how individuals make choices subject to how much income they have available to spend and the prices of goods and services.

The law of Diminishing utility

As consumption of a good increases, marginal utility decreases

Marginal Utility

 the additional satisfaction or benefit that a consumer derives from buying an additional unit of a commodity or service

it describes the change in utility resulting from the consumption of one unit of a good or service. Marginal utility can be positive, negative, or zero

Substitution effect

interprets why a consumer increased, reduced, or stopped buying a certain product when its price increased or decreased compared to its substitutes.

As the price of a good decreases, the consumer substitutes that good in place of other goods prices  have not changed

Income Effect

A change in the quantity demanded of a good or service due to a change in a consumer's real income or purchasing power.

Indifference Curve

All combinations of 2 goods make the consumer equally well-off

The slope of the indifference curve (slope of a tangent line)

change in y divided by change in x

Opportunity Cost

value of what is forgone to undertake an activity

Scarcity

• idea that resources are limited and that we need to make choices about how to allocate them. 

Absolute scarcity

physical limitations to resources

Relative Scarcity

being naturally limited, but is also scarce relative to demand.

The 4 factors of production

1. Land  

2. Labor  

3. Capital 

4. Entrepreneurship 

land

• Natural resources that are used  

• Agriculture and farming + natural resources  

labor

Effort expended by an individual to bring a product  

Human Capital

he economic value of a worker's experience  

Capital

 items that allow a person or business to produce goods and services. 

Entrepreneurship 

combines all the other factors of production into a product or service for the consumer market 

Positive Economics

• Describes and explains economic phenomena in objective terms  

• The "what" 

• Quantification and description  

Normative Economics

• Focuses on subjective statements about economic fairness  

• How the economy should be organized  

• The "ought to be" 

• Value-based judgements aimed at improving economic development