Market Structures - Economic efficiency Flashcards
When does allocative efficiency occur?
Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price that they are able and willing to pay) equals the cost of the factor resources used up in production.
Define the term efficiency?
Efficiency is about a society making optimum use of scarce resources to help satisfy changing needs and wants.
What is the main condition required for allocative efficiency?
The main condition required for allocative efficiency in a market is that market price = marginal cost of supply
AR = MC
When is allocative efficiency achieved?
When MSC = MSB
When the market price takes into account externalities from production and consumption.
When can a firm be considered productively efficient?
A firm can be considered productively efficient when it is operating at the lowest point on its average cost curve.
Unit costs have been minimised
When does a firm operate at the lowest average cost?
When AC = MC
Average costs = Marginal costs
How can a firm be productively efficient?
By minimising the wastage of resources
What is the relationship between productive efficiency and the productive possibility frontier?
Productive efficiency relates to when an economy is on their production possibility frontier.
When is an economy productively efficient?
An economy is productively efficient when it can only produce more of one good by producing less of another.
When does social efficiency occur?
The socially efficient level of output and/or consumption occurs when marginal social benefit (MSB) = marginal social cost (MSC).
Why does the private level of consumption or production differ from social optimum?
The existence of negative and positive externalities
What does the price mechanism not always consider?
The price mechanism does not always consider social costs and benefits.
When does dynamic efficiency occur?
Dynamic efficiency occurs when businesses supplying a market successfully meets our changing needs and wants over time.
What is the key component to the achievement of dynamic efficiency?
Crucial to dynamic efficiency is whether the market generates rapid innovation both in the processes of supply and the range of products available.
