Definition of Pareto efficiency Pareto efficiency is said to occur when it is impossible to make one party better off without making someone worse off. A Pareto improvement is said to occur when at least one individual becomes better off without anyone becoming worse off. Pareto efficiency will occur on a production possibility frontier. When …
A Pareto improvement occurs when an economic action leads to a net welfare gain, without anyone being made worse off. See also: Pareto efficiency. Pareto improvement and a production possibility curve Moving from point D to A or B – leads to a Pareto improvement because we can produce both more services and goods. However, …
Definition of Rational expectations – an economic theory that states – when making decisions, individual agents will base their decisions on the best information available and learn from past trends. Rational expectations are the best guess for the future. Rational expectations suggest that although people may be wrong some of the time, on average they …
In economics we often see a delay between an economic action and a consequence. This is known as a time lag. An impact of time lags is that the effect of policy may be more difficult to quantify because it takes a period of time to actually occur. Example of time lags Change in interest …
Summary: Productive efficiency is concerned with the optimal method of producing goods; producing goods at the lowest cost. Allocative efficiency is concerned with the optimal distribution of goods and services. Example: An economy could be productively efficient in producing large numbers of boots – but if they were all for the left foot, it would …
A look at the extent to which policy makers face a trade off between unemployment and inflation. The Phillips curve suggests there is a trade off between inflation and unemployment, at least in the short term. Other economists are more sceptical.
Diagrams showing how shifts in aggregate demand (AD) and aggregate supply (AS) affect macroeconomic equilibrium – real GDP and price level (PL) Includes short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) and classical and Keynesian view of LRAS curves. A simple macroeconomic equilibrium where AD = AS. Increase in AD when economy is close …
Interest rates are the cost of borrowing money. Interest rates are normally expressed as a % of the total borrowed, e.g. for a 30-year mortgage, a bank may charge 5% interest per year. Interest rates also show the return received on saving money in the bank or from an asset like a government bond. Different …