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SELECTED ISSUES IN MICROECONOMICS:WELFARE ECONOMICS

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Introduction to Economics ­ECO401
VU
UNIT - 7
Lesson 7.1
SELECTED ISSUES IN MICROECONOMICS
WELFARE ECONOMICS
Welfare economics is a branch of economics dealing with normative issues (i.e., what should
be).
The Marginal Private Cost of Advertising:
The marginal private cost of advertising is the cost of every additional TV commercial or
newspaper advertisement that a firm has to bear. However, this does not include the nuisance
cost that such advertisements sometimes cause to viewers of television or readers of
newspapers. If firms incorporated these costs into their calculations, they would do less
advertising. Concerns such as these fall into the realm of welfare economics.
Social Cost:
Social cost (benefit) means the cost (benefit) -- may not be in monetary terms ­ that is borne
by (accrues to) society on the whole. The private cost (benefit) of any individual entity (firm or
consumer) is subsumed in the social cost (benefit) to society, but obviously not vice versa.
The Concept of Externality:
Formally, an externality exists when the production or consumption of a good directly affects
businesses or consumers not involved in buying and selling it and when those spillover effects
are not fully reflected in market prices.
A positive (negative) externality arises from the beneficial (harmful) spillover effect of
production or consumption for society. If the externality is a result of private production
decisions, it is called a production externality. If it is caused by private consumption decisions,
it is called a consumption externality.
Optimal Level of Production:
A socially optimal level of production of a good means the level of production at which the
externality is fully internalized, i.e. the equilibrium price and quantity are determined at the
intersection of the marginal "social" benefit curves and marginal "social" cost curves, and NOT
the intersection of marginal private benefit (demand) curves and marginal private cost (supply)
curves.
A tax (subsidy) raises (reduces) prices by shifting the supply curve vertically upwards
(downwards).
Market failure is an imperfection in the price system that prevents an efficient allocation of
resources.
Public Good:
A public good is one whose benefits are indivisibly spread among the entire community,
whether or not particular individuals desire to consume the good or not.
There are two characteristics which give rise to public goods: non-rivalness (one person's use
or consumption of the good does not reduce the ability of another to use it; e.g. air) and non-
excludability (it is not possible to exclude anyone from the consumption of the good; e.g.
national defense).
THE MARKET FOR FACTORS OF PRODUCTION
The circular flow of income and expenditure shows the flow of goods and factors between
households and firms.
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Introduction to Economics ­ECO401
VU
The Demand for Factor of Production:
The demand for factors of production (like labour) is a derived demand, because it is "derived"
from the goods market. For e.g., the demand of labour increases when the demand for a
labour-intensive good rises, and as firms try to produce more of that good by employing more
labour.
Leisure:
Leisure is the time not used for working, or earning wages. It is usually the time that a laborer
uses for relaxation and all activities other than work or necessary sleep.
The Marginal Disutility of Work (MDU):
The marginal disutility of work (MDU) means the negative impact on the laborer of working for
one additional unit of time. The MDU curve defines the supply curve for labour.
The Opportunity Cost:
The opportunity cost of working is leisure (and vice versa) that the worker could have enjoyed
during that time had he not been working.
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Table of Contents:
  1. INTRODUCTION TO ECONOMICS:Economic Systems
  2. INTRODUCTION TO ECONOMICS (CONTINUED………):Opportunity Cost
  3. DEMAND, SUPPLY AND EQUILIBRIUM:Goods Market and Factors Market
  4. DEMAND, SUPPLY AND EQUILIBRIUM (CONTINUED……..)
  5. DEMAND, SUPPLY AND EQUILIBRIUM (CONTINUED……..):Equilibrium
  6. ELASTICITIES:Price Elasticity of Demand, Point Elasticity, Arc Elasticity
  7. ELASTICITIES (CONTINUED………….):Total revenue and Elasticity
  8. ELASTICITIES (CONTINUED………….):Short Run and Long Run, Incidence of Taxation
  9. BACKGROUND TO DEMAND/CONSUMPTION:CONSUMER BEHAVIOR
  10. BACKGROUND TO DEMAND/CONSUMPTION (CONTINUED…………….)
  11. BACKGROUND TO DEMAND/CONSUMPTION (CONTINUED…………….)The Indifference Curve Approach
  12. BACKGROUND TO DEMAND/CONSUMPTION (CONTINUED…………….):Normal Goods and Giffen Good
  13. BACKGROUND TO SUPPLY/COSTS:PRODUCTIVE THEORY
  14. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):The Scale of Production
  15. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):Isoquant
  16. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):COSTS
  17. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):REVENUES
  18. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):PROFIT MAXIMISATION
  19. MARKET STRUCTURES:PERFECT COMPETITION, Allocative efficiency
  20. MARKET STRUCTURES (CONTINUED………..):MONOPOLY
  21. MARKET STRUCTURES (CONTINUED………..):PRICE DISCRIMINATION
  22. MARKET STRUCTURES (CONTINUED………..):OLIGOPOLY
  23. SELECTED ISSUES IN MICROECONOMICS:WELFARE ECONOMICS
  24. SELECTED ISSUES IN MICROECONOMICS (CONTINUED……………)
  25. INTRODUCTION TO MACROECONOMICS:Price Level and its Effects:
  26. INTRODUCTION TO MACROECONOMICS (CONTINUED………..)
  27. INTRODUCTION TO MACROECONOMICS (CONTINUED………..):The Monetarist School
  28. THE USE OF MACROECONOMIC DATA, AND THE DEFINITION AND ACCOUNTING OF NATIONAL INCOME
  29. THE USE OF MACROECONOMIC DATA, AND THE DEFINITION AND ACCOUNTING OF NATIONAL INCOME (CONTINUED……………..)
  30. MACROECONOMIC EQUILIBRIUM & VARIABLES; THE DETERMINATION OF EQUILIBRIUM INCOME
  31. MACROECONOMIC EQUILIBRIUM & VARIABLES; THE DETERMINATION OF EQUILIBRIUM INCOME (CONTINUED………..)
  32. MACROECONOMIC EQUILIBRIUM & VARIABLES; THE DETERMINATION OF EQUILIBRIUM INCOME (CONTINUED………..):The Accelerator
  33. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS
  34. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….)
  35. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):Causes of Inflation
  36. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):BALANCE OF PAYMENTS
  37. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):GROWTH
  38. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):Land
  39. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):Growth-inflation
  40. FISCAL POLICY AND TAXATION:Budget Deficit, Budget Surplus and Balanced Budget
  41. MONEY, CENTRAL BANKING AND MONETARY POLICY
  42. MONEY, CENTRAL BANKING AND MONETARY POLICY (CONTINUED…….)
  43. JOINT EQUILIBRIUM IN THE MONEY AND GOODS MARKETS: THE IS-LM FRAMEWORK
  44. AN INTRODUCTION TO INTERNATIONAL TRADE AND FINANCE
  45. PROBLEMS OF LOWER INCOME COUNTRIES:Poverty trap theories: