A-LEVEL ECONOMICS (9708)
A2 Content 1: Basic economic ideas & resource allocation
1.1 Efficient resource allocation
● Economic efficiency: where scarce resources are used in the most efficient way to
produce maximum output
○ Best possible solution to economic problem
○ Eg. Agriculture: When max crop yields result from given land area
○ Eg2. Manufacturing: As much output produced from given set of inputs
es
○ Achieved when economies worldwide are using all of the world’s resources efficiently
○ Impossible to increase the output of one good without sacrificing the other
○ Productive efficiency: when a firm is producing at the lowest possible cost using the
least possible resources
■ Eg. car assembly plant using most up to date technology;
ot
minimising COP
■ Productive efficiency = minimum point of LRAC
■ Can only exist when economy is producing on the boundary
of its PPC (on the line: X)
N
● Point X: Productive efficiency
○ Can’t produce any more because resources
are scarce & minimum possible resources
are being used
● Point Y: Product inefficiency
ay ○ More products can be made with resources available
■ Competition can lead to productive efficiency
● Firms constrained to produce at lowest possible cost in a competitive
market
● Profit incentive = make products at lowest
nj
possible cost
■ Diagram:
● P = price
● Q = quantity
Sa
● Productive efficiency & allocative efficiency is
achieved at pq
● Long run equilibrium = perfectly competitive
firms is given by price & quantity
○ Allocative efficiency: where price is equal to marginal cost; firms are producing those
goods and services most wanted by consumers
■ Price = Marginal Cost (P= MC)
a
● Marginal cost = measure of opportunity cost of the resources used to
produce this unit
● When price = marginal cost, consumers are prepared to pay what it
ni
costs to produce it
● Price paid by consumer = true economic cost of producing the last
unit of the product
○ Economic cost: combination of losses of any goods that have
So
a value attached to them by any one individual
■ Opportunity cost is the benefits lost from rejecting
another good, economic cost is the loss lost from
rejecting another good
■ Resources perfectly follow consumer demand at equilibrium
■ When firms produce combination of g/s most wanted by consumers
● Allocative inefficiency occurs when g/s is over/under produced,
preventing an outcome which will maximise consumer satisfaction
■ No waste; producers & consumers satisfied infinite wants
, ● Ensures right amount of product is produced
● Price willing to pay reflects preferences & benefits derived from
consumption
● Represents additional benefit derived from consumption of one more
unit of a good
● Maximisation of society surplus
■ Can’t illustrate on PPC
● Any point on frontier could be a point provided price = marginal cost
es
at this point
● Exact location depends on consumer preferences (not under PPC)
■ Competition leads to allocative efficiency
● Perfect competition; firms constrained to produce goods that
consumers want relative to their COP
ot
■ Eg. 7th unit cost $8 but consumers only
value at $5 (P<MC)
● P<MC = loss for producer
● 4th unit is P = MC
N
■ Motivations for allocative efficiency
● Make greatest possible profit
● Competitive markets forces firms to produce goods demanded by
consumers
● Pareto optimality: where it is impossible to make someone better off without making someone
ay
else worse off
○ When resources are allocated in the most efficient way where
it is impossible to increase the production of one good without
decreasing the production of another good
○ Will occur on PPC
nj
■ Point X: Pareto inefficient
● Can still make one person is made better off
without making someone else worse off
○ Improvement in economic efficiency
Sa
needs compensation to those that are
worse off
■ Point Y: Pareto efficient
● impossible to increase output of capital goods without reducing output
of consumer goods
○ Eg. New road benefits users of the road (journey shortened) but people staying near
the roads affected by noise/pollution
a
● Dynamic efficiency: the greater efficiency a firm benefits from over a period of time due to
improvements in technical/productive efficiency
○ When firms meet changing needs of the market by innovating/changing production
ni
process in response to competitive pressures
○ Eg. firms use excess profits for R&D, bringing consumers benefits (new tech & lower
prices ) & giving firm more efficient production process
○ Long term with opportunity cost
So
■ Obtain investment funds from dividends or borrowing
■ Results in higher costs in short run before payback years
later after investing
○ Dynamic efficient firm’s long run and cost curve shifts down
■ LRAC1 to LRAC2: Cost reduce while output remains
unchanged
○ Eg. Motor vehicle manufacturing
■ Growing intensity of competition to be more fuel
efficient/less pollutant
A2 Content 1: Basic economic ideas & resource allocation
1.1 Efficient resource allocation
● Economic efficiency: where scarce resources are used in the most efficient way to
produce maximum output
○ Best possible solution to economic problem
○ Eg. Agriculture: When max crop yields result from given land area
○ Eg2. Manufacturing: As much output produced from given set of inputs
es
○ Achieved when economies worldwide are using all of the world’s resources efficiently
○ Impossible to increase the output of one good without sacrificing the other
○ Productive efficiency: when a firm is producing at the lowest possible cost using the
least possible resources
■ Eg. car assembly plant using most up to date technology;
ot
minimising COP
■ Productive efficiency = minimum point of LRAC
■ Can only exist when economy is producing on the boundary
of its PPC (on the line: X)
N
● Point X: Productive efficiency
○ Can’t produce any more because resources
are scarce & minimum possible resources
are being used
● Point Y: Product inefficiency
ay ○ More products can be made with resources available
■ Competition can lead to productive efficiency
● Firms constrained to produce at lowest possible cost in a competitive
market
● Profit incentive = make products at lowest
nj
possible cost
■ Diagram:
● P = price
● Q = quantity
Sa
● Productive efficiency & allocative efficiency is
achieved at pq
● Long run equilibrium = perfectly competitive
firms is given by price & quantity
○ Allocative efficiency: where price is equal to marginal cost; firms are producing those
goods and services most wanted by consumers
■ Price = Marginal Cost (P= MC)
a
● Marginal cost = measure of opportunity cost of the resources used to
produce this unit
● When price = marginal cost, consumers are prepared to pay what it
ni
costs to produce it
● Price paid by consumer = true economic cost of producing the last
unit of the product
○ Economic cost: combination of losses of any goods that have
So
a value attached to them by any one individual
■ Opportunity cost is the benefits lost from rejecting
another good, economic cost is the loss lost from
rejecting another good
■ Resources perfectly follow consumer demand at equilibrium
■ When firms produce combination of g/s most wanted by consumers
● Allocative inefficiency occurs when g/s is over/under produced,
preventing an outcome which will maximise consumer satisfaction
■ No waste; producers & consumers satisfied infinite wants
, ● Ensures right amount of product is produced
● Price willing to pay reflects preferences & benefits derived from
consumption
● Represents additional benefit derived from consumption of one more
unit of a good
● Maximisation of society surplus
■ Can’t illustrate on PPC
● Any point on frontier could be a point provided price = marginal cost
es
at this point
● Exact location depends on consumer preferences (not under PPC)
■ Competition leads to allocative efficiency
● Perfect competition; firms constrained to produce goods that
consumers want relative to their COP
ot
■ Eg. 7th unit cost $8 but consumers only
value at $5 (P<MC)
● P<MC = loss for producer
● 4th unit is P = MC
N
■ Motivations for allocative efficiency
● Make greatest possible profit
● Competitive markets forces firms to produce goods demanded by
consumers
● Pareto optimality: where it is impossible to make someone better off without making someone
ay
else worse off
○ When resources are allocated in the most efficient way where
it is impossible to increase the production of one good without
decreasing the production of another good
○ Will occur on PPC
nj
■ Point X: Pareto inefficient
● Can still make one person is made better off
without making someone else worse off
○ Improvement in economic efficiency
Sa
needs compensation to those that are
worse off
■ Point Y: Pareto efficient
● impossible to increase output of capital goods without reducing output
of consumer goods
○ Eg. New road benefits users of the road (journey shortened) but people staying near
the roads affected by noise/pollution
a
● Dynamic efficiency: the greater efficiency a firm benefits from over a period of time due to
improvements in technical/productive efficiency
○ When firms meet changing needs of the market by innovating/changing production
ni
process in response to competitive pressures
○ Eg. firms use excess profits for R&D, bringing consumers benefits (new tech & lower
prices ) & giving firm more efficient production process
○ Long term with opportunity cost
So
■ Obtain investment funds from dividends or borrowing
■ Results in higher costs in short run before payback years
later after investing
○ Dynamic efficient firm’s long run and cost curve shifts down
■ LRAC1 to LRAC2: Cost reduce while output remains
unchanged
○ Eg. Motor vehicle manufacturing
■ Growing intensity of competition to be more fuel
efficient/less pollutant
