Title of presentation MARKET AND ECONOMIC EFFICIENCY Department: Business AdministrationCourse Title: Financial Accounting Course Code:ACC-134 Prepared for MD, Ridwan Reza Lecturer Department of BUA
Prepared by Ashfaqur Rahman ID:1001010141 Faglul Karim Raihan ID:1001010142 Ahadujjaman ID:1001010131 ID:10010101 ID:10010101 ID:10010101 Section: C Batech No: 24thDepartment: Business Administration Date of Presentation:30/12/2010
Object Of Presentation What is market What is efficiency Economic efficiency Details of three conditions Adam Smith’s Invisible Hand Other factors for increasing economic efficiency
What is market A market is any mechanism where the sellers of a particular good or service can meet with the buyers of that goods and service where there is a potential for a transaction to take place. The buyers must have something they can offer in exchange for there to be a potential transaction.
What is efficiency Efficiency means that the economy’s resources are Being Used as effectively as possible to satisfy people’s needs and desires. For production, economic efficiency means the fixed amount of commodity produce in minimum price. So in this condition we can say that the market is efficient. In the market mechanism the producer wants maximum profit. That’s why they produce in minimum cost. The another side of efficiency is that the amount of production of product should be in a point where the marginal cost and marginal utility are same.
Economic Efficiency Economic efficiency refers to how well productive resources are allocated with respect to the costs and benefits of using those resources. One definition of an efficient allocation of resources is a situation in which all resources are employed and no person can be made better off by shifting resources from their current use without making someone else worse off. When government actions alter the results of a market economy, such actions can be evaluated in terms of economic efficiency by examining the additional costs and the additional benefits of the action. Economic efficiency is improved only if the additional benefits exceed the additional costs. An allocation of resources (quantity) is economically efficient where no reallocation can make one person (human being or business) better off without making another worse off.
Three sufficient conditions foreconomic efficiency All users achieve same marginal benefit; All suppliers operate at same marginal cost; and Every user’s marginal benefit = every supplier’s marginal cost. When marginal benefit is less than marginal cost, society overall could gain by reducing provision of that item, and vice versa.
Another side of efficiency The another side of efficiency is that the amount of production of product should be in a point where the marginal cost and marginal utility are same. For production, economic efficiency means the fixed amount of commodity produce in minimum price. So in this condition we can say that the market is efficient. In the market mechanism the producer wants maximum profit. Thats why they produce in minimum cost.
Details of three conditions Same marginal benefit. If one paper mill gets more profit than another, the company should switch some wood supplies to the higher profit mill. Buyer surplus will increase. The company’s overall profit will be higher. Same marginal cost. If one forest can produce wood at a lower marginal cost than another, then the company should direct the lower cost forest to produce more and the higher cost forest to produce less. Seller surplus will increase. The company’s overall profit will be higher. Marginal benefit = marginal cost. If the marginal benefit of wood to the paper mills is less than the marginal cost of production wood, the company should cut back production. The reduction in benefit would be less than the reduction of cost. The company’s overall profit will be higher. The sum of buyer and seller surplus will increase.
Adam Smith’s Invisible Hand (a) Perfect competition achieves economic efficiency. i. In a competitive market, buyers and sellers acting independently and selfishly, channel scarce resources into economically efficient uses (satisfying all three conditions). The invisible hand that guides buyers and sellers is the market price. ii. Market prices allocate scarce resources in an economically efficient way. Prices lead to an efficient allocation of resources by providing information and incentives: (1). Users buy until marginal benefit equals price (to maximize benefit); (2). Producers supply until marginal cost equals price (to maximize profit); (3). Users and producers face same price.
Adam Smith’s Invisible Hand b) Market or price system: the economic system in which resources allocated through the independent decisions of buyers and freely moving prices. The market system is more efficient than planning. Under central planning: (1). The government or company headquarters about costs and revenues and decides on production. (2). Work incentives are generally very weak.
Balancing market power and efficiencygains The antitrust community continues to struggle for the optimal way to handle such mergers, which can arise from large combinations in concentrated markets‑‑oligopoly. Large mergers in concentrated markets that promise significant efficiency gains, however, have long perplexed the antitrust enforcement system. The enforcement systems ability to evaluate these difficult mergers depends on three related factors: decision‑making criteria, evaluative techniques, and workability.
Example Suppose that the government decides to help consumers bylowering the price of bread with a subsidy to sellers. The graphbelow indicates the effects of this policy. The subsidy makes theprice of bread look higher to sellers, and they produce more. Itmakes the price look lower to buyers, and they buy more. Becauseboth buyers and sellers would appear to be happy with this result,can we conclude that this subsidy helps the economy? The answeris a surprising "No."
The key to seeing why the subsidy does not increase value is torealize what scarcity implies. The production of more breadrequires more resources, and these resources must be drawn fromother uses. To get the extra bread, consumers must do with less ofother goods.
Other factors for increasingeconomic efficiency1. Promoting the efficient operation of markets to support growth,2. Removing barriers to global trade etc .It is a government priority to support a country like UKto export growth to emerging, high growth markets suchas China, India and Russia, by building better links withthese countries while also making the most of existinglarge export markets.