the meaning of allocative, productive and dynamic efficiency as these relate to the optimal operation of markets

Question 1

Allocative Efficiency

Answer 1

• occurs when all g/s within an economy are distributed according to consumer preferences
• $ = MC of production
• the $ consumers are willing to pay for a g/s reflects the marginal utility they get from consuming the product
• optimal outcome –> MC = MB
• found in perfectly competitive markets –> firms in markets don’t have enough market power to increase prices
• in order to survive, they have to produce what society values the most at the $ consumers are willing to pay

Question 2

Productive Efficiency

Answer 2

• occurs when the optimal combination of inputs results in the max amount of output at minimal costs
• when firms operate at the lowest point of their ATC curve
• requires all firms to use the least costly FoP, best processes, most advanced technology

Question 3

Dynamic Efficiency

Answer 3

• describes the productive efficiency of an economy/firm over time
• occurs as innovation and new technologies are developed over time, reducing production costs

Question 4

Consumer Surplus

Answer 4

• difference between what a consumer is willing to pay and what they can actually pay
• area under the demand curve and above the market price

Question 5

Producer Surplus

Answer 5

• difference between the lowest price a firm was willing to accept and what they actually get
• area above the supply curve and below the market price

Question 6

Economic Surplus

Answer 6

• CS + PS = ES

- no restrictions –> perfect market –> no externalities

Question 7

Deadweight Loss

Answer 7

• caused by a inefficient allocation of resources

- when supply and demand are out of equilibrium