Chapter 1 Efficiency and Market Failure Flashcards
What is the two types of economic efficiency?
Productive and allocative efficiency
What is the purpose of productive efficiency?
Minimise cost, maximise profit
What is the purpose of allocative efficiency ?
To allocate resources to individuals to those who value them the most
Four types of market structure
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
Total cost is equal to
fixed cost plus variable cost
Average total cost is equal to
average fixed cost + average variable cost
average total cost/total output
Marginal cost
change in cost/ change in the number of outputs
Productive efficiency is achieved
at the minimum point of the ATC, the point where marginal cost curve crosses the average total cost
Allocative efficiency can be shown using _____ diagram.
supply and demand
What is efficiency ?
getting the most benefit from the scarce resources
using the resources in the most economical way possible
one of the micro objectives
Why is economic efficiency important ?
-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
Resources are _______ & __________
finite and limited
types of resources (four)
land, labour, capital and entrepreneurship
What is productive efficiency
using least amt of resources to produce a given good/ service OR
output is produced at the lowest possible cost
Two elements of productive efficiency
technical efficiency (getting the max outputs) AND cost efficiency (using the most appropriate combination of factors of production)
Productive efficiency can be shown on ________ & __________
PPF and (ATC and MC)
What is allocative efficiency ?
an optimal distribution of goods and services to achieve the greatest net socially benefit
When does allocative efficiency occur?
when marginal utility = marginal cost
When MC > MU ?
When MU>MC ?
- overconsumption, society overproducing
- vice versa
What is deadweight loss ?
A cost to society created by market inefficiency
Reasons of deadweight loss ?
Taxes, subsidies, price ceilings/floors, externalities and monopoly pricing
What is market failure ?
happens when a society fails to produce an efficient allocation of resources
What is the consequence of market failure ?
loss of social and economic welfare
Why market failure ?
- underprovision of public goods
- underprovision of merit goods
- overprovision of demerit goods
- information failure
- positive externalities
- negative externalities
- existence of monopoly power
- existence of monopsony power in the labor market
- factors immobility
What is cost of production?
The total cost incurred by a business to produce a specific quantity of a product/ provide a service
