1D Flashcards
What is productive efficiency?
Where production takes place using the least amount of scarce resources, producing at minimum long run average costs.
What does productive efficiency imply
-least costly labour, capital and land inputs are used
-the best available technology and the most efficient production processes are harnessed
-wastage of resources in production processes is minimised
Formula=AC=MC
What is allocative efficiency
When society is producing an appropriate bundle of goods relative to consumer preference.
- where an economy allocated its resources to produce a balance of goods that matches consumer preferences.
-consumer satisfaction is maximised
-where the value to consumers of an extra unit of a hood is equal to the cost of producers of the resources used
P=mc
What is economic efficiency
Where both allocative and productive efficiency are allocated.
Where the market successfully allocated and uses resources to achieve both allocative and productive efficiency.
What is market failure
Where the free market mechanism does not lead to a optimal allocation of resources.
MSB does not equal MSC
-resources are not currently allocated to match consumers wants and needs
- wrong quantities of goods are produced
-overconsumption/production, underconsumption/production
What is an information gap
A lack of knowledge about a product results in consumers and producers making decisions that do not maximize welfare.
-All economic agents need perfect information about market conditions to make rational decisions.
-Consumers need full, current and accurate information on prices of the good they want to consume and all private and external costs and benefits.
Asymmetric information
Where some participants in a market have better information about market conditions than others.
-For markets to work perfectly, consumers and producers need the same level of full and accurate information about the good.
-Causes an imbalance and the market can be skewed if this occurs between consumers and producers.
Why does information failure occur
When consumers base their economic decisions on wrong/limited information and so potentially make wrong choices
Reasons for info failure
Inaccurate or misleading information- due to advertising
Incomplete information-lack of knowledge of benefits/harm
Complex information-requires special knowledge to understand
Addiction- Consumers no longer able to form decisions purely based on price.
Information gaps can be seen in insurance markets- Adverse selection- A person at risk is more likely to take out insurance
Moral hazard- A person who has taken out insurance may be likely to take more risk.
All leads to computation problems.
What is a merit good
A good with unanticipated benefits for consumers, which is therefore under-consumed in a free market.
e.g-education, museums, libraries
Merit good steps to market failure
-There is info failure because individuals do not fully perceive the benefits that they will gain from consuming good.
-Therefore the good is undervalued and the D curve is too low.
-So there is underconsumption so too little produced/traded.
There is AI- too few resoruces are allocated to production of too low a quantity.
-MF
What is a demerit good
A good with unanticipated harm for consumers, which is therefore overconsumed in a free market.
e.g alcohol, fags, vapes
More private costs than realised
Demerit good steps to MF
-info failure-individuals do not fully perceive the costs that they will incur from consuming the good.
-Good is overvalued-D curve too high
-Overconsumption-too much produced/traded.
-AI-too many resources allocated to the production of too much of a quantity.
-MF
What is an externality
A cost or benefit that is external to a market transaction so is not included in market prices and has an impact on thrid parties.
What is a third party
An individual who is not directly involved in either the consumption or production of the good.
