Allocative Efficiency

Question 1

What curve are MPC and MSC on?

Answer 1

Supply Curve

Question 2

What curve are MPB and MSB on?

Answer 2

Demand Curve

Question 3

What is on the Y axis?

Answer 3

Price,Costs,Benefits

Question 4

Define Social Costs

Answer 4

Private Costs (price) + External costs(Pollution)

Question 5

Define External Costs

Answer 5

Impact on third parties not compensated for

Question 6

Define Social Benefits

Answer 6

Private Benefits(Satisfaction/Protection) + External Benefits(Vaccine)

Question 7

Define External Benefits

Answer 7

Impact on third parties which are not compensated to the firm or person consuming

Question 8

Three Positives of an Allocatively efficient market:

Answer 8

1. Maximisation of society Surplus (Consumer Surplus + Producer Surplus)
2. Maximisation of net social benefit (MSB = MSC)
3. Resources will perfectly follow consumer demand

Question 9

Explain “Maximisation of Society Surplus”

Answer 9

In a free market only two economic agents matter (consumers) and (producers)

Consumers will desire and producers will allocate scarce resources to produce goods to satisfy those desires

If both are as happy as they can be (Area of both combined is as large as possible)

We have the best allocation of resources

Question 10

Explain “Maximisation of net social benefit (MSC = MSB)”

Answer 10

If you produce at a point above Q* (Equilibrium) then MSC > MSB there will therefore be a loss to society with any additional good produced from that point

If you produce at a point below Q* then MSB > MSC so producing more will cause a benefit for society (there is untapped potential for society to benefit) so definitely needs more production!

Question 11

Explain “Resources Perfectly Follow consumer Demand”

Answer 11

Everything that is being produced via producers (firms) is being demanded via consumers and bought. This means that there are no shortages, no excess demand and no surplus of stock

Question 12

Assumptions for an Allocatively Efficient market (5) :

Answer 12

1. Many buyers and sellers
2. Perfect information
3. No barriers of entry
4. Firms are profit maximisers
5. Consumers are utility maximisers

Question 13

What happens if the Assumptions in the market are broken?

Answer 13

This gives way for there to be externalities to the demand and therefore a misallocation of resources.

This is because, it can cause things to not be accounted for and therefore there will be External costs and Benefits

This will change the Positions of MSB and MSC and there will therefore be new equilibriums for societies welfare vs private welfare

We believe consumers act on their own utility and therefore they will still buy at MPB = MPC and not the socially optimum amount

Question 14

What does Allocative Efficiency Mean?

Answer 14

Allocation of resources that leads to an overall maximum satisfaction in the economy (MSB = MSC)