Chapter 1 Efficiency and Market Failure

Question 1

What is the two types of economic efficiency?

Answer 1

Productive and allocative efficiency

Question 2

What is the purpose of productive efficiency?

Answer 2

Minimise cost, maximise profit

Question 3

What is the purpose of allocative efficiency ?

Answer 3

To allocate resources to individuals to those who value them the most

Question 4

Four types of market structure

Answer 4

Perfect competition: no diff between the products, high number of sellers
Monopolistic competition: can see the diff but high num of sellers
Oligopoly: few sellers but large in sizes
Monopoly: one seller

Question 5

Total cost is equal to

Answer 5

fixed cost plus variable cost

Question 6

Average total cost is equal to

Answer 6

average fixed cost + average variable cost
average total cost/total output

Question 7

Marginal cost

Answer 7

change in cost/ change in the number of outputs

Question 8

Productive efficiency is achieved

Answer 8

at the minimum point of the ATC, the point where marginal cost curve crosses the average total cost

Question 9

Allocative efficiency can be shown using _____ diagram.

Answer 9

supply and demand

Question 10

What is efficiency ?

Answer 10

getting the most benefit from the scarce resources
using the resources in the most economical way possible
one of the micro objectives

Question 11

Why is economic efficiency important ?

Answer 11

-to eliminate waste as resources are distributed to their most valuable uses
-resources are distributed in a way that gives most economic output and benefits to consumers

Question 12

Resources are _______ & __________

Answer 12

finite and limited

Question 13

types of resources (four)

Answer 13

land, labour, capital and entrepreneurship

Question 14

What is productive efficiency

Answer 14

using least amt of resources to produce a given good/ service OR
output is produced at the lowest possible cost

Question 15

Two elements of productive efficiency

Answer 15

technical efficiency (getting the max outputs) AND cost efficiency (using the most appropriate combination of factors of production)

Question 16

Productive efficiency can be shown on ________ & __________

Answer 16

PPF and (ATC and MC)

Question 17

What is allocative efficiency ?

Answer 17

an optimal distribution of goods and services to achieve the greatest net socially benefit

Question 18

When does allocative efficiency occur?

Answer 18

when marginal utility = marginal cost

Question 19

When MC > MU ?
When MU>MC ?

Answer 19

1. overconsumption, society overproducing
2. vice versa

Question 20

What is deadweight loss ?

Answer 20

A cost to society created by market inefficiency

Question 21

Reasons of deadweight loss ?

Answer 21

Taxes, subsidies, price ceilings/floors, externalities and monopoly pricing

Question 22

What is market failure ?

Answer 22

happens when a society fails to produce an efficient allocation of resources

Question 23

What is the consequence of market failure ?

Answer 23

loss of social and economic welfare

Question 24

Why market failure ?

Answer 24

1. underprovision of public goods
2. underprovision of merit goods
3. overprovision of demerit goods
4. information failure
5. positive externalities
6. negative externalities
7. existence of monopoly power
8. existence of monopsony power in the labor market
9. factors immobility

Question 25

What is cost of production?

Answer 25

The total cost incurred by a business to produce a specific quantity of a product/ provide a service