Economic Efficiency

Question 1

What is efficiency about

Answer 1

Making optimal use of their scarce resources to help satisfy our ever changing wants and need

Question 2

What is allocative efficiency concerned with

Answer 2

Whether we are producing the goods and services that match our changing needs and preferences and which we place the greatest value on.

Question 3

When is allocative efficiency reached

Answer 3

When no one can be made better off without making someone else worse off - this is known as Pareto efficiency

Question 4

Allocative efficiency occurs when

Answer 4

The value that consumers place on a good or service (reflected in the price they are willing and able to play) equals the cost of the resources used up in production

Question 5

Allocative efficiency

Answer 5

P = MC

Question 6

Effect of a monopoly on allocative efficiency

Answer 6

Monopolies have pricing power- may increase their profit margins (turn consumer surplus into producer surplus)- consumers suffer a reduction in their welfare

Question 7

All points that lie on the PPF are..

Answer 7

Allocatively efficient because we cannot produce more of one product without affecting the amount of all other products available

Question 8

Pareto defined allocative efficiency as…

Answer 8

A position ‘where no one could be made better off without making someone else at least as worse off’ - illustrated using a PPF (cannot produce more of one without producing less of another)

Question 9

If an economy is operating within the PPF..

Answer 9

There will be an under-utilisation of resources causing output of goods and services to be lower than is feasible

Question 10

If every market in the economy is a competitive free market..

Answer 10

The resulting equilibrium throughout the economy will be Pareto-efficient

Question 11

When is productive efficiency achieved

Answer 11

When the output is produced at minimum average total cost; when businesses minimise wastage of resources

Question 12

When does dynamic efficiency occur

Answer 12

Over time and it focuses on changes in the amount of consumer choice available in markets together with the quantity of goods and services available- linked to innovation

Question 13

What is innovation (dynamic efficiency)

Answer 13

Putting a new idea or approach into action. Innovation is ‘the commercially successful exploitation of ideas’.
(It has demand and supply-side effects in markets and the economy as a whole)

Question 14

What is product innovation

Answer 14

Small and frequent subtle changes to the characteristics and performance of a good or a service

Question 15

What is process innovation

Answer 15

• changes to the way in which production takes place or is organised
• changes in business models and pricing strategies

Question 16

Where does the socially efficient level of output and of consumption occur?

Answer 16

Where marginal social benefit = marginal social cost (maximised social welfare)

Question 17

The existence of externalities means that (social efficiency)

Answer 17

The private optimum level of consumption or production often differs from the social optimum leading to some form of market failure and a loss of social welfare- price mechanism doesn’t always take into account the costs

Question 18

Key causes of market failure

Answer 18

• externalities
• public goods
• merit goods
• de merit goods
• information failures
• monopolies
• immobility of factor inputs