Allocative efficiency/ market failure

Question 1

What is allocative efficiency??

Answer 1

Occurs when customer satisfaction is maximised/ where quantity supplied equals quantity demanded.

Question 2

What does marginal mean?

Answer 2

additional/one more unit

eg marginal cost is the cost of making one more unit.

Question 3

What is equilibrium production and why is over and under production not allocatively efficient?

Answer 3

Equilibrium production is where supply = demand at P and Q. Over and underproductions are just surpluses and shortages of demand and supply, and aren’t allocating resources efficiently as a result.

Question 4

What is market failure?

Answer 4

Where the free market mechanism fails to achieve economic activity

a situation where an unrestricted market leads to either an under allocation or over allocation of resources to a specific economic activity.

Question 5

What is productive efficiency? When is an economy productively efficient?

Answer 5

Exists when the producers minimise the wastage of resources. An economy is productively efficient if it can produce more of one good by producing less of another