Concept of economic efficiency
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If we think of the demand curve as a marginal benefit (MB) curve and the supply curve as marginal cost curve (MC) curve, then the point of market equilibrium is the point where MB =MC. When this happens, it means that society’s resources are being use to produce the “right” quantity of the good. In other words society has allocated the “right” amount of resources to the production of the good and is producing the quantity of the good that is mostly wanted by society.
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Concept of economic efficiency
- 1. BA/BBA SEMESTER V AUGUST 28, 2021 DELIVERED BY PROF. S.K TANNAN, FACULTY, SCHOOL OF LAW, RAFFLES UNIVERSITY, NEEMRANA, RAJASTHAN, INDIA Concept of Economic Efficiency
- 2. Productive or Technical Efficiency It occurs when the firms produces at the lowest possible cost. The condition for productive efficiency is given by P = minimum average total cost. (ATC) or when MC = AC. Production of the good uses up the least amount of resources possible. In the long run, price will equal the Average Total Cost.
- 3. How is productive efficiency different to profit maximizing level of output? Profit Maximizing Level of Output = Marginal Revenue (MR) = Marginal Cost (MC) Productive Efficiency Marginal Cost (MC) = Average Cost (AC) In perfect competition, in the long run, both of these are the same.
- 4. PRODUCTIVE EFFICIENCY At the output q, the firm is able to produce at the most efficient level of output – the lowest average cost of production. This is the cost c. So q is known as the productively efficient level of output. We know that MC always cuts the AC at its lowest point. The Productively Efficient Level is MC=AC.
- 5. Allocative Efficiency Allocative efficiency occurs when firms produce the particular combination of goods and services that consumers most prefer. In other words, the forces of supply and demand work perfectly in the allocation of resources – not real world stuff!!, but it is important. It is achieved in perfect competition, but not in other situations. With Allocative efficiency, consumer and producer surplus are maximized.
- 6. Consumer Surplus Consumer surplus is defined as the highest price consumers are willing to pay for a good minus the price actually paid Consumer surplus indicates that whereas many consumers were willing to pay a higher price to get the good, they actually received it for less.
- 7. CONSUMER SURPLUS EXPLAINED Consumer surplus indicates that whereas many consumers were willing to pay a higher price to get the good, they actually received it for less. Eg. Some consumers were willing to pay P2 in for quantity Qa. Yet they got Qa by paying the lower price Pe. The difference between P2 and Pe is the consumer surplus for quantity Qa. We can also talk about a consumer surplus for P3 also.
- 8. Producer Surplus Producer surplus is defined as the price received by firms for selling their goods minus the lowest price that they are willing to accept in order to produce the good. The lowest price they are willing to accept represents the firms cost of producing an extra unit of the good (or marginal cost) and is shown by the supply curve
- 9. Why is it called producer surplus? Why is it called producer surplus? Eg: Firms that were willing to produce Qa for price P5 actually received Pe, which is determined in the market. The difference Pe-P5 is the producer surplus for quantity Qa. Therefore producer surplus is shown by the shaded area between the equilibrium price Pe and the supply curve, representing the difference between price received and the marginal cost. MB(Marginal Benefit)= MC(Marginal Cost)
- 10. Reinterpreting Market Equilibrium to understand Allocative Efficiency If we think of the demand curve as a marginal benefit (MB) curve and the supply curve as marginal cost curve (MC) curve, then the point of market equilibrium is the point where MB =MC. When this happens, it means that society’s resources are being use to produce the “right” quantity of the good. In other words society has allocated the “right” amount of resources to the production of the good and is producing the quantity of the good that is mostly wanted by society.