WHAT IS ALLOCATIVE EFFICIENCY

Question 1

@ free market equilibrium there is an

Answer 1

efficient allocation of scarce resources

Question 2

draw a diagram w effieicnet allocaiton of scarcer reources

Answer 2

y axis = price/costs/benefits

x axis = quantity

s = mpc = msc

d= mpb = msb

demand and supply cross at perfection of p* q*

label cs & ps

title - efficient allocation of scarce resources

Question 3

supply is equal to

Answer 3

marginal private cost

marginal social cost

Question 4

what is private cost

Answer 4

cop for a producer

e.g gas and electricity

Question 5

what does marginal mean in PRODUCTION CASE
**

Answer 5

extra cost of producing one extra unit

Question 6

the supply curve here is upward sloping due to the

Answer 6

law of diminishing marginal returns

Question 7

explain why the supply curve is upward sloping

Answer 7

if mc increase everytime and therefore the next unit is more expenisev

suppliers want a higher price each time to produce extra units to cover costs and make profit

Question 8

how do we calculate social cost / what is it made of and means

Answer 8

private costs + external costs

Question 9

what are external costs

check definition

Answer 9

impacts on 3rd parties not involved in the transaction

but effected by production of a good

Question 10

if a 3rd party is impacted by external costs negatovley how does this effect the social cost equation

Answer 10

EC are real

they exist more

so it becomes a positive figure

sc are now higher than private COSTS

Question 11

if a 3rd party is impacted by external costs positivley how does this effect the social cost equation

Answer 11

they exist less so are negative

and this brings down the social cost

Question 12

WHY DOES S = MPC = MSC only

2 points

Answer 12

We assume in a free market that’s operating well and being allocativley efficient

that there’s no external costs at all

Question 13

demand is equal to

Answer 13

Marginal Private benefit

Marginal Social Benefit

Question 14

what are private bebenfits in consumption terms

Answer 14

individual consumer benefits/satisfaction achieved from consuming

Question 15

what is marginal in the DEMand sense

Answer 15

extra benefit achieved from consuming one more unit of a good

Question 16

why is MPB downward sloping

Answer 16

law of dimininshing marginal utility

Question 17

whats the law of diminishing marginal utility

Answer 17

less satisfaction is gained form the previous unit as you increase consumption

Question 18

social benefit =

Answer 18

private benefit + external benefit

Question 19

what is an external beenfit of consumption

Answer 19

an imapct on a 3rd party due to consumption

Question 20

if an EB/impact is +Ve on a 3rd party due to consumption what is the effect ont he SB equation

Answer 20

EB figure will be positive

meaning social benefits will be greater than private benefits

Question 21

if an external benefit/ impact on 3rd party due to production is negative what is the effect on the SB equation

Answer 21

consumption harms the 3rd party so eb becomes -ve so brings down SB compared to pb

Question 22

in a free market operating competitivley and allocating resources well what do we assume about consumption

Answer 22

no externalities in consumption at all

so

D= MPB= MSB

Question 23

Allocative efficiency occurs when what 3 things gtake place

Answer 23

Maximisation of Society Surplus

Maximisation on Net Social Benefit

Where resources perfectly follow consumer demand

Question 24

society surplus is the sumof

Answer 24

consumer surplus + producer surplus

Question 25

MAX OF SOCIETY SURPLUS - basic eocn problemis

Answer 25

how ro allcoate scarce reosurces given unlimited wants

Question 26

MAX OF SOCIETY SURPLUS - who ar ethe tw most improtant economic agents in a free market

Answer 26

consuers who have the wants and producers who can produce output to satisfy these wants

Question 27

MAX OF SOCIETY SURPLUS - When can we not be doing any better w allocation of scarce resources Hint agents

Answer 27

if in aosr both agents are as happy as possible

Question 28

MAX OF SOCIETY SURPLUS - when do we have this talkign about a certain section on the graph

Answer 28

triangles representing consumer and producer surplus are the greatest they canbe

Question 29

MAX OF SOCIETY SURPLUS - when is consumer surplus maximised on the grapgh

Answer 29

d=s i.e equilibrium at p* and q* cs+ ps = big triangle

Question 30

MAX OF SOCIETY SURPLUS - the triangle of society surplus on our grpah is greatest size we cna obtia IN A FREE MKT what happens if we move ht eprice above or below

Answer 30

There'll be aloss of welfare compared to the size of the triangle

Question 31

MAXIMISATION OF NET SOCIAL BENEFIT - where does this occur in a free mkt htis is happening at assuming we have

Answer 31

where MSB=MSC in a free market this is happening at equilibrium assuming we have no EC/EB S=MSC D=MSB are both equal to each other

Question 32

MAXIMISATION OF NET SOCIAL BENEFIT - explain how were not maximing social beenfit when move beyond( to the right) of Q*

Answer 32

if we produce at any quanittiy beyond Q* our SC are higher than out SB therfore we are not maximising our net SB as this q causes it to reduce

Question 33

MAXIMISATION OF NET SOCIAL BENEFIT - explain how were not maxing social beenfit when we move to the left of Q*

Answer 33

silly to stop there as social beenfit will always be greater than social cost up until Q so stoping at any Q below q* means we loose out on potential net social benefit by not producing those units so we keep producing to add more benfots than costs which keep happening up till Q* therfore equilibrium is at MSC=MSB we're maxing net SB as we cant gain anymore and not loosing any

Question 34

WHERE RESOURCES PERFECTLY FOLLOWING CONSUMER DEMAND - What does this mean no no no this happens at .... in mkt

Answer 34

no excess supply no excess demand no shortages This happens ar equilib price in mkt

Question 35

WHERE RESOURCES PERFECTLY FOLLOWING CONSUMER DEMAND - in a free market at p* everything being produced by producers is being ... and ... there are no ...

Answer 35

demanded and able to be bought by consumers there are no surpluses and shortagrs

Question 36

WHERE RESOURCES PERFECTLY FOLLOWING CONSUMER DEMAND - we find thers a perf allocation of scarce resources @ p* explain what this means at this price ... so

Answer 36

@ this price exactly what's being produced is following consumer demand perfectly so s= d so we're achieving point of this para

Question 37

We solve the basoc econ problem w the three points made but onteh basis of 5 assumptions state them hint- similar to perfect competiton

Answer 37

many buyers and seller perf info for C&P no barriers to entry/exit - so firms can compete/leave if theu want to firms are profit maxers consumers are utility maximiser s

Question 38

If any of assumption break down waht can this cause

Answer 38

it canbe a source of mkt failure whereby mkt equilib isnt at the allocativley efficient point

Question 39

overall mkt equilib occurs at

Answer 39

MPC = MPB (S=D) THIS IS THE PRIVATE OPTIMUM

Question 40

If assumption breaks down there may be a difference between

Answer 40

private optimum and social optimum

Question 41

what is the social optimum

Answer 41

MSC =MSB

Question 42

Why is the social optimum/ msc=msb allocativley efficient its maximisation of where as we assume

Answer 42

because its the maximisation of net social benefit where msc - msb is where mpc = mpb as we assume no external costs and no external beenfits

Question 43

when one of our assumptions break down what do we drop

Answer 43

our other assumption that there are noe xternal costs and benefit