Efficiency Flashcards
1
Q
Free market
A
- self interest
- max satisfaction/profits
- mkt DD and SS forces guide resource allocation
2
Q
Demand (D) in free mkt
A
- shows px consumers willing to pay for each additional unit
- D = MPB (marginal private benefit)
3
Q
Supply (S) in free mkt
A
- opportunity cost of producing additional unit
- opp cost: next best alternative gds forgone
- S = MPC (marginal private cost)
4
Q
Eqm (E) in free mkt
A
- MPB = MPC
- DD = SS
5
Q
Does free mkt achieve efficiency in resource allocation?
A
- assume externalities and mkt imperfections don’t exist
- Eqm (0Q) = socially desirable output level, max society’s welfare
- efficiency in resource allocation achieved
6
Q
Economic efficiency
A
- allocative + productive efficiency
- right combi and qty of gds
- produced at lowest LRAC
- max consumer welfare, producer profit
7
Q
Allocative efficiency
A
- allocation of resources
- from producing combi and qty of gds
- most preferred by society
- P = MC
- no under/over production
- MSB = MSC
8
Q
Marginal social benefit (MSB)
A
- total benefits to society as a result of consumption of additional unit of gd
- MSB = MPB + MEB (marginal external benefit)
9
Q
Marginal society cost (MSC)
A
- true cost to society as a result of consumption of additional unit of gd
- MSC = MPC + MEC
10
Q
Market eqm
A
- MPB=MSC , MSB=MSC
- net benefit highest possible
- society welfare max
11
Q
Underproduction (MSB > MSC)
A
- for last unit of output produced, MSB > value of next best alternative benefit forgone (opp cost)
- draw graph
12
Q
Overproduction (MSB < MSC)
A
- firms increase output beyond optimal lvl
- opp cost
- draw graph
13
Q
Productive efficiency
A
- allocation of resources achieved
- when all firms used least-cost combi of inputs
- to produce a given level of output
- lowest LRAC
- no wastage in the use of resources
- High monopoly power – X-inefficiency, higher COP
