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Positive analysis
Describes what will happen if a certain policy is adopted, focusing on objective forecasts and effects.
Normative analysis
Assesses what should happen, requiring value judgments about the outcomes of policies.
Economic efficiency
A criterion to evaluate policies based on the generation of economic surplus; more surplus equals a better outcome.
Economic surplus
Measures the benefits that follow from a decision, less the costs incurred.
Underproduction
Occurs when the actual quantity produced is less than the efficient quantity, leading to deadweight loss.
Overproduction
Occurs when the actual quantity produced is greater than the efficient quantity, also leading to deadweight loss.
Deadweight loss
The difference between the largest possible economic surplus at the efficient quantity and the actual economic surplus.
Equity
Concerns whether a policy yields a fair distribution of economic benefits.
Market power
When a small number of sellers dominate a market, undermining competitive pressures and leading to inefficiencies.
Externalities
Side effects of economic transactions that affect third parties, potentially leading to market failure.
Rational Rule for Markets
The principle that states to produce until marginal benefit equals marginal cost for maximum economic surplus.
Inefficient outcome
Results from market failures where supply and demand do not lead to maximum economic surplus.
Willingness to pay
The maximum price a buyer is willing to pay for a good, reflecting their marginal benefit.
Process vs. Outcomes
An important distinction where some believe that how a decision is made (the process) matters more than the outcomes it produces.
Government failure
Occurs when government policies lead to worse outcomes than those produced by market forces.
Distributional consequences
Effects of new policies regarding who gets what and whether the distribution seems fair.
Value judgment
A personal assessment regarding whether something is good or bad, often influencing normative analysis.
Minimum wage
A legal floor on the wage rate that can be paid to workers, often debated in terms of its impacts on employment and welfare.
Market failure
A situation where market forces fail to produce an efficient outcome, often leading to inefficiencies and lost surplus.
Self-interest
The pursuit of one's own benefits, which can lead to overall efficient outcomes in a competitive market despite individual participants not coordinating.
Public policy
Decisions and actions taken by the government to address public issues and regulate various aspects of economic and social life.
Value judgments
Assessments regarding the merits of an outcome based on personal or societal values, influencing normative analysis.
