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SOCIETY'S PRODUCTION POSSIBILITIES SCHEDULE -this depicts the maximum level of private good that society can enjoy for each level of public goods. -if society wishes to enjoy more public goods, it has to give up some private goods. -production possibilities schedule traces the various amounts of 2 goods that can be produces efficiently with a given the technology and resources in this case: public good and private good.

2.EFFICIENCY FROM THE PERSPECTIVE OF A SINGLE MARKET -in deciding how to demand individuals equate the marginal benefit they recieve from consuming on extra unit with the marginal cost the price they have to pay. -in deciding how much to supply, firms equate the marginal benefit they recieve, which is just the price, with the marginal cost. -at the market equilibrium, where S equals D, the marginal benefit (to costumers) is equal to the marginal cost to firms and each equals the price.

3.THE UTILITY POSSIBILITIES CURVE (9) -gives the maximum level of utility that one individual (Fruday/A) can achieve, given the level of utility of the other individual (Crusoe/B). -along the frontier, it is not possible for Crusoe/B to consume more unless Friday/A consumes less. -therefore, the utility possibilities curve is downward-sloping: the higher Crusoe's/B utility the lower the maximum level of Friday's/A utility.

4.ROBINSON'S BUDGET CONSTRAINT

-given income of $ 100, the price of orange of $ 2 and price of apple of $ 1, an individual can purchase any combination of apples and oranges along or to the left of the budget constraint. -any combination to the right of the budget constraint is unaffordable. -the slope of the budget constraint is based on the relative prices of oranges and apples.

5.THE CONSUMER'S CHOICE PROBLEM -the budget constraint gives the combinations of apples and oranges that Robinson can buy, given his income and give the price of apples and oranges. -the indifference curve those combinations of apple and oranges among which Robinson is indifferent. A and B are on the same indifference curve; Robinson is indifferent between them. -individuals prefere combinations of apples and oranges which are on a higher indifference curve. -thus, point F is preferred to eighter A or B. -Robinson chooses the point along the budget constraint which he most prefers, that is, the point where the indifference curve Io is tangent to the budget constraint (point E).

6.ISOQUANTS AND ISOCOST LINES (PRODUCTION EFFICIENCY) -an isoquant gives combinations of inputs (land and labor) which yield the same output. -the isoquant labeled Q1 represents a higher level of output than the isoquant labeled Q2. -the slope of the isoquant is the marginal rate of technical substitution. -the isocost line gives those combinations of inputs which cost the same amount. -the slope of the isocost line is given by the relative prices of the two inputs. -the firm maximizes its output, given a particular level of expenditures on inputs, at the point where the isoquant is tangent to the isocost line. At the point the marginal rate of tehnical substitution equals the relative price.
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7.PRODUCT MIX EFFICIENCY REQUIRES THAT THE MARGINAL RATE OF TRANSFORMATION EQUAL COSTUMERS' MARGINAL RATE OF SUBSTITUTION -in order to reach the highest level of costumers' utility, the indifference curve and the products possibilities schedule most be tangent (point E). -at any other point, such as E', costumer utility is lower than at E. -utility is maximized at the point of tendency of the indifference curve to the production possibilities schedule.

8.SOCIAL INDIFFERENCE CURVES -describe how society evaluates tradeoffs between Friday and Crusoe; it gives the combinations of utilities between which society is indifferent. -society is better off on a higher social indifference curve; just as an individual is better off an a higher individual indifference curve. -and just as the individual chooses the point on the budget constraint at which the indifference curve is tangent to the budget constraint, society's preferred point on the utility possibilities curve is the point at which the social in curve is tangent to the utility possibilities curve.

9.UTILITY POSSIBILITY CURVE (3) -as oranges are transferred from Crusoe to Friday, Crusoe's utility is decreased and Friday's increased. -in moving from point A to B the gain in Friday's utility appears much greater than the loss in Crusoe's utility. -that is because Friday is so much worse off than Crusoe. -in moving from B to C the gain in Friday's utility is still larger than loss in Crusoe's utility, but the trade-off has changed so that Friday's gain is smaller than the gain from A to B.

10.ALTERNATIVE SHAPES OF INDIFFERENCES CURVE

a) UTILITARIANISM

-a utilitarian is willing to give up ones utility as long as the others gains are at least an equal amount of utility. -One unit of utility of person A is in trade off with one utility of person B same measure.

b) UNEQUAL UTILITY

-society should be willing to accept a decrease in the utility of the poorer only if there is a much larger increase in the utility of the rich. -the social indifference curve should only reflect these unequal utility values between the poor and the rich.

c) RAWLSIANISAM

-the welfare of society only depends on the welfare of the worst-off individual. -society is better off if you improve welfare of the worst-off individual but gains nothing from improving the welfare of others. -in this approach, there is NO TRADEOFF. -no amount of increase in the betteroff individuals welfare can compensate society for a decrease in the welfare of the worst-off individual.

11.COMPENSATED VERSUS UNCOMPENSATED DEMAND CURVES -gives the demand for a good assuming, as price is changed, that money i taken away or given to the individual to leave him jut as well off as he was before the price change. -it tust measures only the substitution effect associated with the price changes. -because as price is lowered individuals are better off, and as a result buy slightly more of (normal) commodities, the ordinary demand curve is slightly flatter than the compensate demand curve.

12. CONSUMER SURPLUS

The difference between what an individual is willing to pay and what he has to pay is called his consumer surplus. An individual's surplus is the difference between what he is willing to pay (represented by the area beneath the demand curve) and what he actually pays (the area under the price line). The consumer surplus here is indicated by the shaded region.
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13. MEASURING INEFFICIENCIES (MEASURING SOCIAL INEFFICIENCY)

-the area ABC measures the deadweight loss, the efficiency loss as a result of a cigarette tax. -a lump-sum tax that would have the same effect on the individual's welfare as the cigarette tax would raise an additional revenue of ABC. -the triangle ABC is called a Harberger triangle.

14.THE LORENZ CURVE WITH INCOME INEGUALITY -Panel depicts a Lorenz curve for an economy where income is unequally distributed. -The curvature of the line indicates that now the bottom 20 percent has less than 20 percent of income, the bottom 40 percent has less than 40 precent of income, and so on.

15.BRIDGES: HOW A USE FEE CAN RESULT IN UNDERCONSUMPTION (NON-RIVAL GOOD AND UNDERCONSUMPTION) -if the capacity is large enought, the bridge is a non-rival good. -while it is possible to exclude people from using the bridge by charging toll, p, this results in an underconsumption to the good, consumption, Qm.

16.DISTORTION ASSOCIATED WITH SUPPLYING GOODS FREELY

(A) For some goods such as water, supplaying the good freely rather than at marginal costs results in relatively little additional consumption. (B) For other goods, such as certain medical services, supplaying the good freely rather than at marginal costs results in extensive overconsumption.

17.TRANSACTIONS COSTS

-when transactions cost are sufficiently high, it may be more efficient to supply the good publicly than to have the good supplied by private markets.

18.INDIVIDUAL DEMANDCURVE FOR PG -The individual's most preffered level of expenditure is the point of tangency between the indifference curve and the budget constraint. -As the tax price decreases (the budget constraint shift from BB to BB'), the individual's most preferred level of public expenditure increases, generating the demand curve of panel B.

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19.EFFICIENT PRODUCTION OF PUBLIC GOODS (MARKET EQUILIBRIUM) -an efficient supply of public goods occurs at the point of intersection of the demand curve and the supply curve. -the collective demand curve gives the sum of what all individuals are willing to give up, at the margin, to have one more unit of public goods (one more gum), while the supply curve gives the amount of other goods that have to be given up to abtain one more unit of the public good.

20.THE FLEASIBILITY CURVE -The Feasibility curve gives the maximum output (consumption) of private goods for any level of public goods, taking into account the inefficiencies that arise from the taxes that must be imposed to raise the requisite revenue. -The feasibility curve lies below the production possibilities schedule.

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