1.0. Economic Efficiency

Question 1

Economic Efficiency (static efficiency)

Answer 1

where scarce resources are used in the most efficient way to produce maximum output. It consists of productive efficiency and allocative efficiency.

Question 2

Features of Economic Efficiency

Answer 2

• Exists when all resources are put to their best use.
• Highly desirable (more efficient –> more profit).
• Important concept.
• Best solution to the economic problem

Question 3

Productive Efficiency

Answer 3

when a firm is producing goods / services using the fewest resources at the lowest possible average cost.

Question 4

Productive Efficiency in Firms

Answer 4

• Occurs at bottom of average cost curve.
• Caused by: competition and profit motive
• Productively inefficient if not at bottom of AC
• y axis = Costs $
• x axis = Quantity

Question 5

Productive Efficiency in Economies

Answer 5

• Productive Efficiency in Firms
• Caused by: competition and profit motive
• Inside PPC is productively inefficient
• y axis = goods
• x axis = services

Question 6

Allocative efficiency

Answer 6

producing those goods and services most wanted by consumers.

Question 7

Allocative efficiency features

Answer 7

• Caused by: competition and profit motive.
• To do with: allocating the right amount of scarce resources to the production of the right G/S.
• This means: producing the combination of G/S that yields the maximum consumer satisfaction.
• When P=MC: the price paid by the consumer represents the true economic cost of producing the last unit of the G/S.
• Can not be shown on a PPC: any point could be it, exact location is unknown.

Question 8

Pareto Optimality

Answer 8

where it is impossible to make someone better off without making someone else worse off.
* Type of allocative efficiency

Question 9

Pareto Optimality Diagram

Answer 9

• On the PPC: indicates Pareto optimality.

- Movement along PPC: means more of one G/S but less of the other G/S

Question 10

Pareto Improvement

Answer 10

where it is possible to make someone better off without making someone else worse off.
* Type of allocative efficiency

Question 11

Pareto Improvement Diagram

Answer 11

• Inside the PPC: indicates Pareto improvement can occur.

- Movement towards PPC: can result in more of one G/S without less of another G/S or more of both G/S.