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Economic efficiency
- 1. Economic Efficiency Section 10.4 Production and Efficiency AS Economics
- 5. Showing allocative efficiency Costs Revenues Output (Q) Demand Supply P1 Q1 Consumer Surplus (CS) Producer Surplus (PS) Consumer Surplus (CS) Producer Surplus (CS)
- 6. A loss of allocative efficiency if output is too low and price too high Costs Revenues Output (Q) Demand Supply P1 Q1 Consumer Surplus (CS) Producer Surplus (PS) P2 Q2 Price level P2 and output Q2 leads to a higher level of producer surplus but a lower level of consumer surplus
- 7. Deadweight loss of welfare Costs Revenues Output (Q) Demand Supply P1 Q1 Consumer Surplus (CS) Producer Surplus (PS) P2 Q2 Loss of economic welfare from output being below the optimal level
- 8. A loss of allocative efficiency if output is too high and price too low Costs Revenues Output (Q) Demand Supply P1 Q1 Consumer Surplus (CS) Producer Surplus (PS) P2 Q3
- 10. The long run average cost curve Costs Output (Q) SRAC1 SRAC2 SRAC3 Q1 Q2 Q3 AC1 AC2 AC3 LRAC Productive efficiency in the long run is achieved when output is produced at the bottom of the long run average cost curve
Notes de l'éditeur
- In economics, money is used as a unit of account to measure value. The value of a good or service to a consumer is given by the price the buyer is willing to pay. Willingness to pay (WTP) is the maximum price a consumer is prepared pay to obtain a product rather than forego consumption and shown by the demand curve. WTP is used as a measure of a consumer’s marginal private benefit (MPB) ie D=WTP In theory, free and perfectly competitive markets produce the goods and services consumers most want in the right quantities and at the lowest possible cost. This is why markets are said to be so powerful and ‘work’.
- Productive efficiency can be defined as: Using the least amount of resources to produce a given product or Output is being produced at the lowest possible unit cost
- Internal Economies of Scale are lower long run unit costs from an increase in the amount of labour & capital used in production A firm can be technically efficient - ie at the lowest point of its SAC curve - and still fails to exploit all potential economies of scale. In the diagram, economies of scale mean the long run average cost curve (LRAC) curve slopes downwards until the Minimum Efficient Scale of output is reached and all potential economies of scale are exhausted. Productive efficiency implies firms are using the least costly labour capital & land inputs in both the short and long run by utilising the best available technology & best production processes. They are exploiting all potential economies of scale and minimise the wastage of resources in their production processes.