You are on page 1of 1

44 PA R T I INTRODUCTION AND BACKGROUND

really should matter to the governor and to the secretary of your department
is not a simple fact about whether the labor supply of single mothers rises or
falls. What should matter is the normative question (the analysis of what should
be): Does this policy change make society as a whole better off or not?
welfare economics The study To address this question, we turn to the tools of normative analysis, welfare
of the determinants of well- economics. Welfare economics is the study of the determinants of well-being,
being, or welfare, in society.
or welfare, in society. To avoid confusion, it is important to recall that the term
welfare is also used to refer to cash payments (such as those from the TANF
program) to low-income single families.Thus, when referring to cash payments
in this chapter, we will use the term TANF; our use of the term welfare in
this chapter refers to the normative concept of well-being.
We discuss the determination of welfare in two steps. First, we discuss the
determinants of social efficiency, or the size of the economic pie. Social efficiency
is determined by the net benefits that consumers and producers receive as a result
of their trades of goods and services. We develop the demand and supply curves
that measure those net benefits, show how they interact to determine equilibri-
um, and then discuss why this equilibrium maximizes efficiency.We then turn to
a discussion of how to integrate redistribution, or the division of the economic
pie, into this analysis so that we can measure the total well-being of society, or
social welfare. In this section, we discuss these concepts with reference to our earlier
example of Andrea choosing between movies and CDs; we then apply these les-
sons to a discussion of the welfare implications of changes in TANF benefits.

Demand Curves
Armed with our understanding of how consumers make choices, we can now
demand curve A curve show- turn to understanding how these choices underlie the demand curve, the
ing the quantity of a good relationship between the price of a good or service and the quantity demanded.
demanded by individuals at
each price. Figure 2-12 shows how constrained choice outcomes are translated into the
demand curve for movies for Andrea. In panel (a), we vary the price of movies,
which changes the slope of the budget constraint (which is determined by the
ratio of movie to CD prices). For each new budget constraint, Andreas opti-
mal choice remains the tangency of that budget constraint with the highest
possible indifference curve.
For example, we have already shown that given her income of $96, at a price
of $16 for CDs and $8 for movies, Andrea will choose 6 movies and 3 CDs
(point A on BC1). An increase in the price of movies to $12 will steepen the
budget constraint, with the slope rising from 12 to 34, as illustrated by BC2.This
increase in price will reduce the quantity of movies demanded, so that she
chooses 3 CDs and 4 movies (point B on BC2). A decrease in the price of
movies to $6 will flatten the budget constraint, with the slope falling from 12
to 38, as illustrated by BC3. This decrease in price will increase the quantity
of movies demanded, and Andrea will now choose to buy 3 CDs and 8 movies
(point C on BC3).
Using this information, we can trace out the demand curve for movies,
which shows the quantity of a good or service demanded by individuals at
each market price. The demand curve for movies, shown in panel (b), maps