Microeconomic objectives

Question 1

What are the two main Microeconomic objectives?

Answer 1

1) EFFICIENCY in allocation of resources; and
2) EQUITY in distribution of goods and services

Question 2

What are the conditions to be satisfied for Efficiency in resource allocation to be achieved?

Answer 2

a) Price = Marginal cost, assuming no externalities; and

b) Marginal Social Benefit (MSB) = Marginal Social Cost (MSC)

Question 3

What are the assumptions to be held for the free market to allocate resource efficiently?

Answer 3

1. Goods and services sold in the free market are RIVALROUS in consumption, and EXCLUDABLE, ie private goods;
2. There is an absence of externalities;
3. There is perfect competition;
4. There is perfect information; and
5. There is perfect mobility of factors of production

Question 4

What is Equity?

Answer 4

Equity refers to an outcome where society considers the distribution of resources to be fair.

Note:
An equitable distribution is not the same as an equal distribution and that different people have different views on what is equitable.