MGEC37H3 Chapter Notes - Chapter 2: Co-Insurance, Neutral Nation, Externality
6 Jul 2013
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Chapter 2: a brief review of microeconomic theory. Economists assume that each actor maximizes something: consumers; utility, firms; profits, politicians; votes, charities; social welfare etc. Economists choose best alternatives subject to constraints to reach equilibrium of maximizing forces: equilibrium: pattern of interaction that persists unless disturbed by outside forces. A production process is said to be efficient if inputs are being used to capacity or production is at lowest marginal cost. Pareto/allocative efficiency exists if it is impossible to change a situation to make one person better off without making another worse off (by their own estimations) Maximization, equilibrium, and efficiency are fundamental in explaining economic behavior. Consumers are assumed to know what they like and dislike and should be able to rank preferences. Consumer preferences are subjective, and therefore exogenous determined outside economic system. We are unable to make interpersonal comparisons of well-being; can"t measure the strength of preferences.
