Unit 6 - Basic economic ideas and resource allocation
Introduction
Economic efficiency: Where scarce resources are used in the most efficient way to
produce maximum output.
Economic efficiency consists of:
● Productive efficiency: Thai occurs when the producers produce at the
lowest cost possible. A firm is productively efficient when it is producing at the
lowest possible cost and making the best use of resources.
● Allocative efficiency: This occurs when firms produce the combination of
goods and services that are most wanted by consumers. The implication is
that there is no waste and both producers and consumers are satisfied with
what is produced. The price that they are willing to pay reflects their
preferences and the benefits they derive from consumption. It represents the
additional benefit of one more unit of a good. The marginal cost of production
is a measure of the opportunity cost of the resources used to produce this
unit. So where the price equals the marginal cost, consumers are prepared to
pay what it costs to produce it (P=MC). It is only where this is so that
resources are allocatively efficient.
Productive efficiency: When a firm is producing at the lowest possible cost.
Allocative efficiency: Where price is equal to marginal cost; firms are producing
those goods and services most wanted by consumers.
When both these parts of economic efficiency co-exist then it is determined that the
best possible use of scarce resources is being made.
A few examples will help explain the macro nature of economic efficiency.
● Oil: The global supply of oil will one day run out, what is not known is when.
Consumption continues to increase not only in developed economies but in
developing economies such as Brazil, India or China. Growing populations,
rising living standards and rising car ownership are just three reasons why
demand is increasing. Oil usage is often inefficient here.
● Timber: The global demand for timber and timber products such as paper
and cardboard shows little sign of abating. By the start of this century only
about ⅕ of the world’s forests remained intact.
● Water: As the global population increases and the effects of climate change
become reality, water becomes scarcer and an even bigger political issue.
, Productive efficiency
Productive efficiency can be shown using a firm’s average cost curve.
Costs Average costs of
production
x
p
0
q
Output
Competition can be seen to cause productive efficiency. This is because firms are
constrained to reducing costs in order to reduce price in a competitive market.
Introduction
Economic efficiency: Where scarce resources are used in the most efficient way to
produce maximum output.
Economic efficiency consists of:
● Productive efficiency: Thai occurs when the producers produce at the
lowest cost possible. A firm is productively efficient when it is producing at the
lowest possible cost and making the best use of resources.
● Allocative efficiency: This occurs when firms produce the combination of
goods and services that are most wanted by consumers. The implication is
that there is no waste and both producers and consumers are satisfied with
what is produced. The price that they are willing to pay reflects their
preferences and the benefits they derive from consumption. It represents the
additional benefit of one more unit of a good. The marginal cost of production
is a measure of the opportunity cost of the resources used to produce this
unit. So where the price equals the marginal cost, consumers are prepared to
pay what it costs to produce it (P=MC). It is only where this is so that
resources are allocatively efficient.
Productive efficiency: When a firm is producing at the lowest possible cost.
Allocative efficiency: Where price is equal to marginal cost; firms are producing
those goods and services most wanted by consumers.
When both these parts of economic efficiency co-exist then it is determined that the
best possible use of scarce resources is being made.
A few examples will help explain the macro nature of economic efficiency.
● Oil: The global supply of oil will one day run out, what is not known is when.
Consumption continues to increase not only in developed economies but in
developing economies such as Brazil, India or China. Growing populations,
rising living standards and rising car ownership are just three reasons why
demand is increasing. Oil usage is often inefficient here.
● Timber: The global demand for timber and timber products such as paper
and cardboard shows little sign of abating. By the start of this century only
about ⅕ of the world’s forests remained intact.
● Water: As the global population increases and the effects of climate change
become reality, water becomes scarcer and an even bigger political issue.
, Productive efficiency
Productive efficiency can be shown using a firm’s average cost curve.
Costs Average costs of
production
x
p
0
q
Output
Competition can be seen to cause productive efficiency. This is because firms are
constrained to reducing costs in order to reduce price in a competitive market.
