Flashcards
ECM21
Cards in this deck (8)
- 1Pareto principle A principle of welfare economics derived from the writings of Vilfredo Pareto, which states that a legitimate welfare improvement occurs when a particular change makes at least one person better off, without making any other person worse off.Pareto Optimality looks at a perfect market economy characterised by equilibrium characterised by equality between supply and demand for each commodity provided. It is impossible to improve the situation of one individual without making another worst off.
- 2Allocation A dominates allocation B in the Pareto sense (“Pareto-dominates”) if the situation of at least one individual is better in A than in B, and the situation of no individual worsens by going from B to A.Pareto-optimal allocation (=efficient allocation)An allocation is Pareto-optimal if there is no other allocation which Pareto-dominates it. In a certain number of cases, the Pareto criterion does not rank a pair of allocations: this happens when the situation of (at least) one individual improves and the situation of (at least) another individual worsens when shifting from one allocation to the other
- 3for Example ***(consider allocation (XA,YA)=(4,5) and allocation (XB YB)=(2,8) (XA,YA)=(6,5) and (XB YB) = (8,2) draw diagram showing increase on y and x axis. Allocations that can not be ranked e.g ***(consider allocation (XA,YA)=(4,4) and allocation (XB YB)=(6,6) (XA,YA)=(6,6) and (XB YB) = (4,4) draw diagram showing increase on y and x axis.Using edgeworth box examples you will notice is dominated by D and A in the second diagram they all dominate A completely. so D,F,E. Next diagram a Allocation is pareto optimal if only it is a tangency point.
Also Pareto criteria does not rank allocations think one person improves another worsens and shifting ALLOCATION. PC does not allow Interpersonal Comparisms of utility. - 4Utilities possibilty frontier or the production possibility frontier graph shows the maximum amount of one person's utility given each level of utility attained by all others in society. Points on the curve are, by definition, Pareto efficient, while points off the curve are not. However, based on the extent of society’s preferences for an equal distribution of real income, a point off the curve may be preferred. All points on or below the utility–possibility frontier are attainable by society; all points above it are not attainable. The utility–possibility frontier is derived from the contract curve.** Remember the points inside the UPF are pareto dominated by some other allocation they are not (pareto optimal) *Point on the UPF are pareto optimal but it is impossible to increase the utility of one without Lowering the other *Points outside are non feasibleAn ISOQUANT is using combination of inputs to the same level of output*** Diagram like the ICER diagram fewer than 500 or over 500 using worker and machinesRember Diagram I1, I2, I3 move away from origin the higher. R
*TECHNICAL EFFICIENCY*- using limited means of input to meet the same level of output. Output raised without using more. How do I produce more using less? How much would it cost me to maximise production? - 5A budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. The formula is =Y=I/PY-PX/PY ** remember the triangular diagram Y and X axis remain the sameTake notes of the shifts in Budget constraint due to increase or decrease inincome level, substitution effects. Explain clearly with Graph the whole what happens to consumption good X if it price goes up. subsitiution-1 good up and the other normal and income unchanged income level= low purchasing power can no longer afford it because price is up.
- 6The offer curve represents the amount of one commodity that the individual is willing to offer in exchange for a certain amount of the other commodity for each price ratio (given her initial endowment).Market equilibrium can be defined as An equilibrium of the exchange economy is a set of prices and quantities such that each individual is choosing a consumption basket that maximises her/his own utility.
- 7find out if there is a relative price such that, for each good, the amount that one individual is willing to give up (=to sell) matches the amount that the other individual is willing to buy.n ** remember edgeworth box diagram with offer curveMarket equilibrium=1 person giving up a good and the other individual buying. remember the diagram that looks like pasta that price of X needs to up relative to Y to achieve equilibrium.
- 8Link to welfare economics terminology try and dumb down slightly and make sure that it is understood from an health economics sense. Highlighted for instance is pareto optimum which would be for socially efficient allocations.Link carefully to welfare economics terminology highlighted scenarios are different. Note that higher indifference curves=higher utility. Mention the benefits of redistribution