Principles Microeconomics - Final Exam Review Sheet | ECON 200, Study notes of Microeconomics

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Brice ECON FINAL EXAM REVIEW SHEET Chapter 1: Ten Principles of Economics (1) People face Trade-Offs (2) The Cost of Something is what you Give up to Get it (3) Rational People Think at the Margin (4) People Respond to Incentives (5)Trade Can Make Everyone Better Off (6) Markets are Usually a Good way to Organize Economic Activity (7) Government can sometimes Improve Market Incomes (8) A country’s Standard of Living Depends on It’s Ability to Produce Goods and Services (9) Prices Rise when the government prints too much money (10) Society Faces a Short-Run Trade-off between Inflation and Unemployment Scarcity- the limited nature of society’s resources Economics- the study of how society manages its scare resources Efficiency- the property of society getting the most it can from its scarce resources Equity-the property of distributing economic property fairly among the members of society Opportunity cost- whatever must be given up to obtain some item Rational people- people who systematically and purposefully do the best they can to achieve their objectives Marginal changes-small incremental adjustments to a plan of action Incentive- something that induces a person to act Market economy- an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services Property rights- the ability of an individual to own and exercise control over scarce resources Market failure- a situation in which a market left on its own fails to allocate resources efficiently Externality- the impact of one person’s actions on the well- being of a bystander Market power- the ability of a single economic actor (or small group of actors) to have substantial influence on market prices Productivity- the quantity of goods and services produced from each hour of a worker’s time Inflation- an increase in the overall level of prices in the economy Business cycle- fluctuations in economic activity, such as employment and production Chapter 2: Thinking Like an Economist: Production possibilities frontier: a graph that shows the combinations of output that the economy can possibly produce given the available factors of the production and the available production technology Microeconomics- the study of how households and firms make decisions and how they interact in markets Macroeconomics- the study of economy wide phenomena, including inflation, unemployment and economic growth Positive statements- claims that attempt to describe the worlds as it is Normative statements- claims that attempt to prescribe how the world should be Chapter 3: Interdependence and the Gains From Trade Absolute advantage- the ability to produce a good using fewer inputs than another producer Opportunity cost- whatever must be given up to obtain some time Comparative advantage- the ability to produce a good at a lower opportunity cost than another producer *trade can benefit everyone in society because it allows people to specialize in activities in which they have the comparative advantage Imports- goods produced abroad and sold domestically Exports- goods produced domestically and sold abroad **gains of trade based on comparative advantage Chapter 4: The Market Forces of Supply and Demand = 2 forces that make markets work Market- a group of buyers and sellers of a particular good or service Competitive market- a market in which there are many buyers and many sellers so that each has a negligible impact on the market price Quantity demanded- the amount of a good that buyers are willing and able to purchase Law of demand- the claim that, other things equal, the quantity demanded of a good falls when the price of a good rises Demand schedule- a table that shows the relationship between the price of a good and the quantity demanded Demand curve- a graph of the relationship between the price of a good and the quantity demanded SHIFTS in the demand curve: INCOME- if demand for a good rises when income falls the good is an inferior good but if the demand for a good falls when income falls the good is called a normal good. PRICES OF RELATED GOODS- when a fall in the price of one good reduces the demand for another good the two good are called substitutes When a fall in the price of one good raises the demand for another good the two goods are called complements TASTES- determinant of your demand if you like something a lot you’ll buy more of it EXPECTATIONS- expectations about the future may affect your demand for a good or service today NUMBER OF BUYERS- the more number of buyers there are in a market the more quantity demanded and the higher the price Quantity supplied- the amount of a good that sellers are willing and able to sell Law of supply- the claim that other things equal the quantity supplied of a good rises when the price of the good rises Supply schedule- a table that shows the relationship between the price of a good and the quantity supplied Supply curve- a graph of the relationship between the price of a good and the quantity demanded SHIFTS in the supply curve- INPUT PRICES- price of an input rises producing goods becomes less profitable and firms will supply less TECHNOLOGY- advances in technology can make producing a good more efficient and less expensive and therefore the firm will produce more of it EXPECTATIONS- if a firm believes the price of a good to rise then they may supply less of their good today and more later b/c they will make a greater profit NUMBER OF SELLERS- supply to the market depends on the number of sellers if a firm decides to drop out of the market the supply in that market would fall Supply & Demand Together Equilibrium- a situation in which the market price has reached the level at which quantity supplied equals quantity demanded Equilibrium price- the price that balances quantity supplied and quantity demanded Equilibrium quantity- the quantity supplied and the quantity demanded at the equilibrium price Surplus- a situation in which quantity supplied is greater than quantity demanded Shortage- a situation in which quantity demanded is greater than quantity supplied Law of supply and demand- the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance 3 STEPS TO ANALYZING CHANGES IN EQUILBRIUM: (2) free markets allocate the demand for goods to the sellers who can produce them at least cost. (3) free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus Chapter 8: The Costs of Taxation -the government taxes people in order to raise revenue and that revenue must come out of someone’s pocket -both buyers and sellers are worse off when a good is taxed -it doesn’t matter whether a tax is levied on buyers the demand curve shifts downward by the size of the tax and when the tax is levied on sellers the supply curve shifts upward by that amount -tax places a wedge between the price buyers pay and the price sellers receive and thus the quantity sold falls below the level that would be sold without the tax -tax revenue is the tax times the quantity and the gvpt uses this revenue to build roads, police and public education -deadweight loss- the fall in total surplus that results from a market distortion such as tax -the losses to buyers and sellers from a tax exceed the revenue raised by the government -equilibrium of supply and demand maximizes the total surplus of buyers and sellers in a market -when a tax raises the price to buyers and lowers the price to sellers it gives buyers an incentive to consume less and sellers an incentive to produce less than they would in the absence of tax -a tax has a deadweight loss because it induces buyers and sellers to change their behavior **the tax raises the price paid by buyers so they consume less, and the tax lowers the price received by sellers so they produce less. **the greater the elasticities of supply and demand, the greater the deadweight loss of a tax. -if a tax gets large enough eventually the revenue will fall Chapter 10: Externalities Externality- the uncompensated impact of one person’s actions on the well- being of a bystander Negative externalities i.e. pollution- certain amount of smoke enters the atmosphere, the smoke creates a health risk for those who breathe the air and it is a negative externality in which the social cost to society is larger than the cost to producers of the products that are emitting the pollution. Internalizing the externality- altering incentives so that people take account of the external effects of their actions. Ex: One way to do this would be to tax pollution so that way people who cannot afford to pay such a tax will not pollute, or if they can afford to pay the tax they would be putting some revenue into the government so that actions can be taken to reduce the effects of pollution. Internalizing the externality is essentially offering alternative incentives so that people take a step back and look at their actions and how they affect other people >Positive externalities- such as education in which there are benefits to society produces more human capital or a more knowledgeable society, lowers crime rate, development of technological advances-the market produces a quantity smaller than what is socially desirable, the social value is more than the private sectors value, the optimal output amount is higher than the market equilibrium quantity **negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable. To remedy the problem the government can internalize externality by taxing goods that have negative externalities and subsidizing goods that have positive externalities. -externalities cause markets to be inefficient Private solutions to externalities- charities (ex the Sierra club to protect the environment), moral codes, and social sanctions (i.e. golden rule), interested or relevant parties (businesses) entering into a contract Coase theorem- the proposition that if private parties can bargain without cost over the allocation of resources they can solve the problem of externalities on their own. Ex: a neighbor Jane has a dog that barks to much, Dick cannot get sleep. So Dick pays Jane to get rid of the dog- depending on how much Jane values the dog, determines how much money Dick has to pay Jane **The Coase Theorem says that private economic actors can solve the problem of externalities among themselves. Whatever the initial distribution of rights, the interested parties can always reach a bargain in which everyone is better off and the outcome is efficient. Transaction costs- the costs that parties incur in the process of agreeing to and following through on a bargain. The Coase Theorem only works when interested parties have no trouble reaching and enforcing an agreement. In the real world bargaining does not always work. 2 government policies that can remedy externalities- (1)command and control policies: regulation- making certain behaviors either required or forbidden i.e. crime to dump poisonous chemicals into water supply or gvpt can put a limit on how much pollution a firm can emit (2) corrective taxes- a tax designed to induce private decision makers to take account of the social costs tat arise from a negative externality. For instance in a pollution problem, a corrective tax will charge a higher price for people who want to pollute and therefore will be successful in decreasing pollution. So for the externality of pollution the government would be essentially charging people to pollute **most taxes on buyers and sellers reduce economic well-being in consumer and producer surplus and when this amount exceeds the amount of revenue the government raises a deadweight loss results IN CONTRAST taxes on externalities reflect the fact that society cares about the well-being of the bystanders who are effected by externalities. Corrective taxes alter incentives to account for the presence of externalities and thereby move the allocation of resources closer to the social optimum- raises revenue for government and enhance economic efficiency -tradable pollution permits- permits that allows only a little bit of pollution affects firms b/ c those firms that have a higher cost of eliminating pollution will be willing to pay more for a permit. -eliminating pollution is impossible Chapter 11: Public Goods & Common Resources Excludability- the property of a good whereby a person can be prevented from using it Rivalry in consumption- the property of a good whereby one person’s use diminishes other people’s use Private goods- are both excludable and rival in consumption you don’t get something unless you pay and once you get it you’re the only person that benefits ex: ice cream cones, clothing, congested toll roads Public goods- goods that are neither excludable nor rival in consumption or people cannot be prevented from using a public good and one person’s use of the good does not reduce another person’s ability to use it ex: tornado siren, national defense, uncongested nontoll roads Common resources- goods that are rival in consumption but not excludable ex: fish in the ocean are rival in consumption ex: fish in the ocean, the environment, congested nontoll roads Natural monopoly- a good that is produced that is excludable but not rival in consumption e: fire protection, cable tv, uncongested toll roads Free rider- a person who receives the benefit of a good but avoids paying for it. The free rider problem is the reason why markets will not supplying public goods. The government can help to remedy the free rider problem by supplying a public good to society and paying for it through tax revenue and will / can provide it if the total benefits outweigh the total costs. 3 of the most important public goods (1)National Defense- once the country is defended it is impossible to prevent any single person from enjoying the benefit of this defense and when one person enjoys the benefit of national defense he does not reduce the benefit to anyone else. (2) Basic research- general knowledge (not patented discoveries or technology) ex: a mathematical theorem once it is proved it is immersed into the public sphere of general knowledge (3) Fighting poverty- some argue that this is a public good because even if everyone prefers living in a society without poverty fighting poverty is not a “good” that private actions will adequately provide. Because of the free rider problem eliminating poverty through private charity will probably not work however taxing the wealthy to raise the living standards of the poor can potentially make everyone better off. Cost benefit analysis- a study that compares the costs and benefits to society of providing a public good. The goal of which is to estimate the total costs and benefits of the project to society as a whole. Governments provide public goods making their decision about the quantity based on cost-benefit analysis. In order to decide whether a public good should be provided or not it has be determined whether the total benefit to society covers the cost of providing and maintaing the good and this is hard to measure Tragedy of the commons- problem created by the use of common resources- a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole. The tragedy of the commons arises because of an externality. The general lesson of the tragedy of the commons: when one person uses a common resource he diminishes other people’s enjoyment of it because of this negative externality common resources tend to be used excessively. The government can solve the problem by reducing use of the common resource through regulation or taxes. 3 important common resources Clean Air and Water- pollution is a negative externality that can be remedied with regulations or corrective taxes on polluting activities. Congested roads- if a road is congested the use of that road yields a negative externality when one person drives on the road it becomes more crowded and other people must drive more slowly >short run curve= less choices in order to save the production; long run= more choices i.e. build more factories and hire more workers causing the ATC to return back to a smaller amount Economies of scale: when long run average total cost declines as the output increases. Can occur when specialization among workers permits each worker to become better at his or her assigned tasks. Diseconomies of scale: when long run average total cost rises as output increases. Can occur when coordination problems occur which are inherent in large organizations. Constant returns to scale: when long run average total cost does not vary with the level of output Chapter 14: Firms in Competitive Markets Market power: if a single firm can influence the market price of the good it sells Competitive Market: a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker Total Revenue: Price of the good times the quantity sold Average Revenue: total revenue divided by the amount of output; Average revenue tells us how much revenue a firm receives for the typical unit sold. **for all firms in a competitive the average revenue always equals the price Marginal Revenue: the change in total revenue from an additional unit sold **for all firms in a competitive market marginal revenue equals the price of the good Profit maximization: > as long as marginal revenue exceeds marginal cost profit will result > if marginal cost is less than marginal revenue a decrease in production should occur > if marginal cost is greater than marginal revenue an increase in production should occur >the firms maximizing point is where marginal cost equals marginal revenue ***in a competitive market Price equals both average revenue and marginal revenue Three rules for profit maximization: (1) if marginal revenue is greater than marginal cost, the firm should increase its output (2) if marginal cost is greater than marginal revenue, the firm should decrease output (3) at the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal *** because the firm’s marginal-cost curve determines the quantity of the good the firm is willing to supply at any price, the marginal-cost curve is also the competitive markets supply curve Firm’s Short-Run Decision to shut down Shutdown: refers to a firms short-run decision not to produce anything during a specific period of tie because of current market conditions. A firm decides to shutdown if P is less than the Average Variable cost. Exit: refers to a firm’s long- run decision to exit the market altogether. Sunk cost: fixed cost {lost money that is unavoidable}; a cost that has already been committed and cannot be recovered ***the competitive firm’s short-run supply curve is the portion of its marginal- curve that lies above average variable cost. The Firm’s Long Run Decision to Enter or Exit a Market >the firm exits the market if the revenue it would get from producing is less than its total costs; exit occurs when Price is less than Average Total Cost > the firm enters the market if Price is greater than the Average Total Cost >in the long-run firms decide to produce the quantity at which marginal cost equals the price of the good and decides to exit if the price is less than the average total cost >the competitive firm’s long-run supply curve is the portion of its marginal cost curve that lies above the Average Total cost curve >Profit can be found by: (Price – Average Total Cost) > Firm’s profit is represented on a graph as a rectangle that equals the equation (P-ATC) X Q {the profit maximizing quantity} >Firm’s loss is represented on a graph as a rectangle that equals the equation (ATC-P) X Q {the loss-minimizing quantity} >Cycle of entry and exit: if firms already in the market are profitable then new firms will have an incentive the quantity of the good supplied and drive down prices and profits. If firms in the market are making losses then some existing firm will exit the market. ***Remaining firms in a market after cycle of entry and exit must be making zero profit. And the process of entry and exit only end when price equals average total cost- the minimum of ATC is representative of a profit of zero. A shift in demand in the short run and long run >a market begins in long run equilibrium with price equaling the minimum average total cost which means the firm is earning zero profit >increase in demand leads to a raise in price and therefore the supply curve rises because the price rises, and demand shifts out the right (increases) because suppliers produce more because of the higher price >in the short run the price of milk exceeds the average total cost and therefore in the short-run the firm is making positive profits >this profit encourages new firms to enter and therefore a vast increase in quantity produced occurs and the price falls >eventually firms have to exit and the market goes back to its original equilibrium ***because firms can enter and exit more easily in the long run than in the short run, the long- run supply curve is typically more elastic than the short-run supply curve; hence the long-run supply curve is typically horizontal Chapter 15: Monopoly Why Monopolies Arise? Monopoly: a firm that is the sole seller of a product without close- substitutes and is fundamentally caused by barriers to entry. A firm that is a monopoly is essentially a price maker. >Barriers to entry: (1) a key resource is owned by a single firm (2) the government gives a single firm the exclusive right to produce some good or service (3) the costs of production make a single producer more efficient than a large number of producers Natural monopoly: a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms- a single firm can produce any amount of output at least cost. A natural monopoly is les concerned about new entrants eroding its monopoly power; however as a market expands a natural monopoly can evolve into a competitive market. A Monopoly’s Revenue Total Revenue: the quantity sold times the price Average Revenue: the total revenue divided by quantity and reflects the amount of revenue the firm receives per unit sold Marginal Revenue: computing the total change in total revenue when output increases and divide by the change in quantity. MR reflects the revenue a firm receives at each additional unit produced***marginal revenue is always less than the price of its good. When a monopoly increases the amount it sells it has two effects on total revenue (1) The output effect: more output is sold, so Quantity is higher (2) The price effect: the price falls, so Price is lower. When a monopoly increases production it must lower its price with each unit it sells. ***demand curve and the marginal revenue curve start at the same point but the MR curve lies below the demand curve and marginal revenue can become negative Profit maximization: >the intersection of the marginal-revenue curve and the marginal- cost curve determines the profit maximizing quantity >when marginal cost is less than marginal revenue the firm can increase profit by producing more units >in monopolized markets price exceeds marginal costs >Monopolies profit is: (Price- Average Total Cost) X Q and is represented on a graph as a rectangular box The Welfare Cost of Monopoly >the monopolist produces less than the socially efficient quantity of output and this is reflected by the monopolist choosing to produce at the level where MR=MC >inefficiency of monopoly is measured by deadweight loss and reflects the reduction in economic well-being that results from the monopoly’s use of its market power. It is the area between the demand curve and the marginal-cost curve equals the total surplus lost because of monopoly pricing. >the problem in a monopolized markets is because the firm produces and sells a quantity of output below the level that maximizes- failure to allocate resources efficiently. Public Policy towards Monopolies (1) By trying to make monopolized industries more competitive (2) By regulating the behavior of the monopolies (3) By turning some private monopolies into public enterprises (4) By doing nothing at all Price discrimination Price discrimination: the business practice of selling the same good at different prices to different customers >rational strategy for profit-maximizing- because the firm is charging the individual consumer more closely to his willingness to pay price >requires the successful ability to separate customers according to their willingness to pay sometimes based on: geography, age, or income >price discrimination can raise overall economic welfare for instance when a firm price discriminates in a way that every consumer receives a product that is efficient usage of the product >the invisible hand does not ensure that total surplus is maximized under monopolistic competition and there is no easy way for public policy to improve market outcome The Debate over advertising Is society wasting the resources it devotes to advertising? >critiques of advertising: firms advertise to manipulate people’s tastes, much advertising is psychological rather than informational. Advertising impedes competition meaning that advertising tries to convince consumers that products are more different than they truly are and by fostering brand loyalty advertising makes buyers less concerned with price differences among similar goods. >defense of advertising: advertising provides information to customers and allows customers to make better choices about what they buy and enhances the ability of markets to allocate resources efficiently. Advertising fosters competition because advertising allows customers to be more fully informed about all firms in the market customers can easily take advantage of price differences. When firms spend a vast amount of money to advertise it infers to customers that that specific brand has a lot of quality. >Brand names provide customers with information about the quality when it cannot be easily judged in advance of the purchase and brand names give firms an incentive to maintain high quality and maintain consistency. Chapter 18: The Markets for the Factors of Production Factors of production: are the inputs used to produce goods and services- land, labor, and capital are the three most important. A firm’s demand for a factor of production is derived from its decision to supply a good in another market (derived demand) Production function: the relationship between the quantity of inputs used to make a good and the quantity of output of that good Marginal product of labor: the increase in the amount of output from an additional unit of labor Diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of the input increases Value of the marginal product: the marginal product of an input times the price of the output. The extra revenue the firm gets from hiring and additional unit of factor of production. A firm bases his decision on how many laborers to hire according to this value. A competitive profit- maximizing firm hires workers up to the point where the value of the marginal product of labor equals the wage. Factors that would cause the labor-demand curve to shift: Output price- when the output price changes the value of the marginal product changes and the labor-demand curve shifts. If the price of a good goes down then there is less demand for labor. Technological change- new and better ways to do things has profound implications for the labor market. Most technological change is labor-augmenting but can be labor-saving meaning that demand for labor would go down and shift the demand curve to the left. The supply of other factors- the quantity available of one factor of production can affect the marginal product of other factors for instance Factors that cause the labor supply curve to shift: change in tastes- changing attitudes toward work ex: women wanting to work nowadays increases labor supply, switching professions because of more satisfaction or a higher wage, immigration increases labor supply and also shifts the demand curve. -the labor wage adjusts to balance the supply and demand for labor -the labor wage equals the value of the marginal product of labor *any event that changes the supply or demand for labor must change the equilibrium wage and the value of the marginal product by the same amount because these must always be equal because this wage is the price at which the market is efficient and profit maximizing. Shifts in labor demand: causes the value of the marginal product to increase and causes the demand for labor to shift to the right. Prosperity for firms in an industry is often linked to prosperity for workers in that industry -labor supply and labor demand together determine the equilibrium wage. Profit maximization by the firms that demand labor ensures that the equilibrium wage always equals the value of the marginal product of labor. Capital- the equipment and structures used to produce goods and services ex: in the apple picking industry the ladders, trucks, and the buildings used to store the apples represent capital stock. Purchase price- the price a person pays to own that factor of production indefinitely Rental price- the price a person pays to use that factor for a limited period of time -essentially the wage is the rental price of labor- -supply and demand determine the compensation paid to the owners of land and the compensation paid to the owners of capital depends on the marginal product of that factor land vs. capital. CASE STUDY: The Black Death >1/3 of the population was wiped out >reduced population- smaller supply of workers the marginal product of labor rises and so wages were raised >land and labor are used together in production- fewer workers available to farm the land any additional unit of land produced less additional output- marginal product of land fell and thus we would expect the black deaths to lower rents Neoclassical theory of distribution- the amount paid to each factor of production depends on the supply and demand for that factor and the demand in turn depends on tat particular factor’s marginal productivity. In equilibrium each factor of production earns the value of its marginal contribution to the production of goods and services. -supply of labor arises from individuals trade-off between work and leisure and an upward sloping labor-supply curve means that people responds to an increase in the wage by enjoying less leisure and working more. -factors of production are used together and therefore the marginal product of one factor depends on the quantities of all factors that are available and as a result a change in supply in one factor alters the equilibrium earnings of all factors. Chapter 19: Earning’s and Discrimination What determines the supply and demand for different types of labor? Compensating differential- a difference in wages that arises to offset the non-monetary characteristics of different jobs ex: coal miners, workers who work the night shift, Human capital- the accumulation of investments in people such as education and on-the job training Union- a worker association that bargains with employers over wages and working conditions Strike- the organized withdrawal of labor from a firm by a union Efficiency wages- above-equilibrium wages paid by farms to increase worker productivity high wages may: reduce worker turnover, increase worker effort, and raise the quality of workers who apply for jobs at the firm. Discrimination- the offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics *competitive markets contain a natural remedy for employer discrimination. The entry into the market of firms that care only about profit tends to eliminate discriminatory wage differentials. These wage differentials persist in competitive markets only when customers are willing to pay to maintain the discriminatory practice or when the government mandates it. -profit maximizing firms can reduce discriminatory wage differentials and generally are more profitable than discriminatory firms -signaling theory- education does not raise productivity however workers who already have high natural ability use education as a way to signal their high ability to employers >3 reasons for above-equilibrium wages- minimum wage laws, unions and efficiency wages. Chapter 20: Income Inequality & Poverty Poverty rate- the percentage of the population whose family income falls below an absolute level called the poverty line Poverty line- an absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty Problems with measuring poverty In kind transfers- transfers to the poor given in the form of goods and services rather than cash Life cycle-the regular pattern of income variation over a persons life- therefore the standard of living in any year depends more on lifetime income than on that years income Permanent income- a persons normal income; a family’s ability to buy goods and services depends largely on this permanent income Political philosophy of redistributing income Utilitarianism- based on the assumption of diminishing marginal utility for it seems reasonable that an extra dollar of income to a poor person provides that person with more additional utility than does an extra dollar to a rich person. The political philosophy according to which the government should choose policies to maximize the total utility of everyone in society. Flaws within utilitarianism- in order to pull money from a rich person the government would essentially be taking away incentive from the rich person and thus the rich person would work less and in addition because of diminishing marginal utility, the rich persons utility falls lower than the rise in utility of the other (poor) person receiving the extra dollar Utility- a measure of happiness and satisfaction Liberalism- the political philosophy according to which the government should choose policies deemed to be just, as evaluated by an impartial observer behind the veil of ignorance. Focus on maximizing the bottom (poorest person’s) minimum utility John Rawls who came up with this philosophy based this on the maxim criterion- the claim that the government should aim to maximize the well-being of the worst off person in society. Flaws within this philosophy (1) people would have no incentive to work hard (2) societies total income would fall substantially (3) and the least fortunate person (that everyone was trying to help) would be worst off than before. Social insurance- government policy aimed at protecting people against the risk of adverse events in other words income redistribution is like an insurance policy when we as a society choose policies that tax the rich to supplement the incomes of the poor, we are all insuring ourselves against the possibility that we might have been a member in a poor family. Libertarianism- the political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistribute income. Argues that only