Topic 7 efficiency Flashcards
What are the two main components of whether something is socially desirable?
Efficency and equity
Productive efficencey
i) allocation of resources within a firm
- each firm should produce at the lowest cost possible
ii) allocation of resources among firms - total output should be produced at the lowest cost
Allocative efficencey
2) Allocative efficiency
No gain should be made by reallocating resources
Gains are maximised (P = MC
First economist to define what an efficient allocation of resources was…
Vilfredo Parteo- 19th century-
He claimed that a given allocation of resources would be efficient if:
it is not possible to make one person better off without making another person worse off
An allocation of resources with this property is a “Pareto optimal”
What is the pareto optimal?
He claimed that a given allocation of resources would be efficient if:
it is not possible to make one person better off without making another person worse off
What is a Pareto improvement?
A “Pareto improvement” is when an allocation is not a Pareto optimal
it is possible to make one person made better off without making
another worse off
What does the Edgeworth box depict?
Every possible outcome from trade between person x and person y
Edgeworth box diagram
What can indifference curves not do?
Cross
