benchmark model of the economy: positive and normative approaches (market…
benchmark model of the economy: positive and normative approaches
the consumer is fully informed about the economy, unaffected by the actions of other consumers or producers, completely mobile in occupation and location and always trying to maximize their utility.
the benchmark model
allocation efficacy (where the limited resources of the country is allocated in accordance with the consumers)
production activities must be Pareto optimal
*(it should not be possible to increase the output of one good with out reducing it of another)8
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economic efficiency in consumption must occur in such a way that no interpersonal relocation of commodities can increase utility of the consumers.
the consumer will maximize utility subject to their own budget or chose the commodity mix that the marginal rate of substitution (the slope of the interference curve) equals the corresponding commodity price ratio, Px/Py. fig 2.6
how much each individual consumes is dependent on
their taste or relative preferences.
their income depends on how much of the resources they own
please read Figure 2.4
Pareto optimality in consumption
implies a situation in which it is impossible to increase the utility of either of the two consumers with out reducing the utility of one of them.
condition 3 (top level condition)
producers and consumers must achieve equilibrium simultaneously, given the slope of the PPC or the MRPT
MRPT (xy) = MCx/mcy = Px/Py =MRS^a (xy) =MRS^b (xy)
this indicates equality between the rate at which each consumer is willing to substitute one commodity of another and the rate at which it is technically possible to do so. simultaneous compliance will insure the optimal production of optimal output mix
efficiency and economic growth
X-efficiency a situation where existing resources are utilized in the most efficient manner.
all economic inefficiency other than allocative inefficiency fall under the term x - inefficiency
X efficiency ensure that society is on its PPC, but can't determine where on the curve
dynamic efficiency: with economic growth the PPC can shift.
lack of information
friction and lags in adjustments
non competitive markets
distribution of income
public enter the public sector: general approaches
direct vs indirect government intervention
direct (tax, budget spending)