Chapter6 Flashcards
Economic efficiency
Where scarce resources are used in the most efficient way to produce maximum output.
Making optimal use of scarce resources
Economic Efficiency= Productive efficiency+Allocative efficiency
Productive Efficiency
When a firm is producing at the lowest possible cost with highest possible output
Allocative efficiency
firms are producing those goods and services most wanted bby customers
Allocative efficiency
Where (market ) price is equal to marginal cost (of supply)
Dynamic Efficiency
The greater efficiency that results from improvements in technical pr productive efficiency over a period of time.
Dynamic efficiency:
Occurs over time
Linked to pace of innovation and improvements
Innovation
The commercially successful exploitation of ideas
Process innovation helps lower the marginal and average cost of supply thanks to improved production or delivery methods
Joseph Schumpter
–> Creative destruction
“the essential fact of capitalism”
Pareto optimality
Where it is impossible to make someone better off without making someone else worse off
Dynamic efficiency is a long-term phenomenon
Market failure
Exists whenever free market, left to its own devices anc totally free from any form of government intervention, fails to make the optimum use of its resources.
‘Fail at delivering economic efficiency’
leads to net social welfare loss
Causes of market failure
Externalities
Information failure
Monopoly power
public goods
Externalities
The spillover effects from production and/or consumption to third parties who are not directly involved in the production or consumption of the product.
