ECON - 6: Gov Policies & Welfare Econ

Welfare Economics

branch of economics that studies how to evaluate and promote the well-being or welfare of individuals and society as a whole

it focuses on assessing and improving the allocation of resources and distribution of goods and services to maximize overall social welfare

main objective is to determine whether a given economic situation is desirable or not, based on its impact on people’s welfare

Willingness to Pay

refers to the maximum amount of money or value that a consumer is willing and able to pay for a good or service

Consumer Surplus

the difference between the most a consumer would pay for a given quantity of a good and what the consumer actually pays

Producer Surplus

a bonus for producers in the short run where the amount by which the total revenue from production exceeds cost

Tax Incidence

the distribution of tax burden between buyers and sellers in the market

Buyer’s Tax Burden

portion of the tax burden or cost of a tax that is borne by buyers or consumers in a market

Seller’s Tax Burden

portion of the tax burden or cost of a tax that is borne by the sellers or producers in a market

Deadweight Loss

the economy inefficiency that occurs when allocation of goods and resources is distorted due to market interventions or due to market failures

Laffer Curve

a graphical representation of the relationship between tax size and tax revenue, typically depicted as an inverted U-shaped curve

Inverted U-shape Curve

graphical shape of the Laffer Curve

Subsidy / Negative Tax

financial assistance or support provided by the government to individuals, businesses, or sectors pf the economy to encourage or promote specific activities, industries, or outcomes

Disequilibrium

the condition that exists in a market when the plans of buyers do not match those of sellers, or a temporary mismatch between quantity supplied and quantity demanded as the market seeks equilibrium

Price Floor

a minimum legal price below which a product cannot be sold, to have an impact a price floor must be set above the equilibrium price

Price Ceiling

a maximum legal price above which a product cannot be sold, to have an impact a price ceiling must be set below the equilibrium price

Utility Analysis

one way economist measure human welfare

Utility

is the sense of pleasure, or satisfaction, or other sense of personal well-being that comes from the consumption of goods and services

Taste and Preferences

utility you derive from a particular good, service, or activity depends, on this

Total Utility

the total satisfaction you derive from consumption, this could refer to either your total utility from one-unit change in your consumption of a good

Marginal Utility

the change in your total utility from one-unit change in your consumption of a good

Law of Diminishing Marginal Utility

the more of a good a person consume per period, the smaller the increase in total utility from consuming one more unit, other things constant

Substitution and Income Effect

when the price of a good falls the good becomes cheaper compared to other goods so consumers tend to substitute that good for other goods

Money Income

number of dollar or peso a person receives per period

Real Income

income measured by goods and services it can buy, it changes when the price changes by what it can buy

Income Effect of a Price Change

a fall in the price of a good increases consumer’s income, making consumers more able to produce more goods

The Role of Time in Demand

plays a crucial role in demand analysis since goods have a money price and a time price

Consumer Equilibrium

a condition in which an individual consumer’s budget is exhausted and the last dollar spent on each goods yields the same marginal utility

Explicit Cost

opportunity cost of resources employed by a firm that takes the form of money payments

Implicit Cost

a firm’s opportunity cost of using it’s own resources or those provided by its owners without corresponding money payment

Accounting Profit

a firm’s total revenue minus its explicit cost

Economic Profit

a firm’s total revenue minus its explicit and implicit costs

Normal Profit

a firm’s accounting profit when all resources earn their opportunity cost, equal to implicit cost

Variable Resource

any resource that can be varied in the short run to increase or decrease production

Fixed Resource

any resource that cannot be varied in the short run

Total Surplus / Social Welfare

the overall well-being of people in the economy, maximized when the marginal cost of production equal the marginal benefit to consumers

marginal benefit = marginal cost

Demand Curve

can be derived using the utility maximizing condition which involves examining how a consumer responds to changes in the price of a product while holding income, the prices of other goods and preferences constant, throughout this process the substitution and income effects are significant factors