This note is very organised and relevant for the Economics Syllabus. For every subtopic, there will be the syllabus content, definition and formula and the key point of every content. This note is very useful for essay writing as well as preparing for MCQs.
Economic efficiency - The optimal use of scarce inputs to produce the
largest possible output
Optimality / optimum - The best situation than can be attained in particular
circumstances
Productive efficiency - The most efficient use of scarce resources whereby
the maximum output is produced with the minimum
of resources
Technical efficiency - The situation in a firm where production is at the
lowest point on the average total cost curve
Allocative efficiency - The quantity of output produced with scarce
resources that leads to the best satisfaction for
consumers
Pareto optimality - Situation when it is not possible to make one
person better off without making someone else
worse off as a result of reallocating resources
Pareto improvement - Changes in production or consumption can make
someone else better off without making anyone
worse off
Dynamic efficiency - The greater efficiency that results from
improvements in technical or productive efficiency
over a period of time
● Efficiency (Static vs Dynamic)
- Static : exist at a point in time → productive and allocative
- Dynamic : over a period of time → long term future development
,● Productive efficiency (in a firm)
- Products are made with the least possible use of scarce resources
- Technical efficiency → least possible resources
- Cost efficiency → least cost
- MC = AC
● Productive efficiency (in an economy)
- Point on PPC → B, D, C
● Maximum use of resource → no wastage → Productively efficient
- Point inside PPC → A
● Wastage exists → Productively inefficient
- Point outside PPC → X
● Unattainable
● Ways to achieve → discovery of new resources, increases in population
● Allocative efficiency
- Producing right products at right quantity
- Producing combination of goods that yields max satisfaction of consumers’ want
- Price = preferences and benefits derived from consumption
- Price = true economic cost of producing the last unit of the good
- P = MC
,● Pareto optimality
- Inputs are used in the most efficient way (productive efficiency) and yields
maximum possible satisfaction to consumer (allocative efficiency)
- Both productive and allocative efficiency are achieved
- Where MSB ≠ MSC → Pareto improvement will be made until pareto optimality is
achieved
- Pareto improvement : D → A , D → B
● Dynamic efficiency
- Output increases relative to the increases in resources
- Innovation → to meet changing demand
- Enjoyed by big firms → use excess profits to engage in R&D
- Consumer → lower price, new technologies
- Long-term phenomenon
- LRAC shifts downward
, 6.2 EXTERNALITIES AND MARKET FAILURE
● reasons for market failure
● positive and negative externalities for both consumers and firms
● inefficient resource allocation
TERMS DEFINITION / FORMULA
Market failure - Market fails at delivering economic efficiency
Externality - Transaction between consumers and producers
affects someone else who is not the party of the
economic decision (third party)
Private cost - Cost of an activity to an individual economic unit
such as a consumer or a firm
Private benefit - Benefits received by an individual consumer or a
firm
● Market failure
- Free market is left on its own → fail to make the optimum use of scarce
resources
- Interaction between demand and supply does not lead to productive and
allocative efficiency
● Reasons for market failure
- Externalities
- Missing market → no provision of public goods
- Existence of monopoly
- Factor immobility
- Income inequality
● Externalities
- Difference exists between private costs and benefits and social costs and
benefits
- Negative externality → external cost
- Positive externality → external benefit
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