Economics - Efficiency

markets

Places, physical or virtual, where buyers and sellers come together to exchange goods, services, or information

well functioning market

• Resources are allocated efficiently

• Goods and services are produced in cost effective ways

• Consumer wants and needs are met

price mechanism

Prices send signals to consumers and producers, helping match supply with demand and allocate scarce resources

market failure

When the price mechanism fails to deliver a socially optimal outcome

Can lead to inefficient use of resources, reduced consumer choice and a decline in community welfare and living standards

optimal outcome

refers to the most efficient allocation of resources, maximising total benefit and minimising waste

socially desirable outcome

considers broader values like fairness, equity and sustainability

allocative efficiency

Achieved when resources go to the production of goods that people want, in the quantities that provide the greatest social benefits and greatest consumer satisfaction

productive efficiency

when resources are used in a way that achieves the maximum quantity of output from a given quantity of resources

productivity

measures how well resources are used to make goods or services - shows how much output is produced for each input

specialisation

using land, labour, capital and enterprise in such a way that their roles in the production process are extremely narrow and clearly defined

economies of scale

when a business grows and produces more, leading to lower costs per unit

dynamic efficiency

the ability of an economy to respond to changing consumer demands by reallocating resources to new industries or production processes

law of diminishing marginal productivity

As more units of a variable factor of production are added to a fixed factor of production, a point will eventually be reached at which the output resulting from each additional unit of the variable factor will start to decline

marginal value

the additional benefit received by a consumer or producer from consuming or producing one more unit of a good or service

perfect competition

Multiple companies to sell the same product or service. Many consumers are looking to purchase those products. None of these firms can set a price for the product or service they are selling without losing business to other competitors.

monopolistic competition

a market structure in which companies compete against each other by offering products or services that are only slightly different. As a result, no single product or service dominates the market.

oligopoly

a market structure where a small number of firms have significant control over market prices and output, often leading to limited competition and potential collusion among the firms

monopoly

A market structure that consists of a single seller or producer and no close substitutes

factor mobility

the ability of factors of productions to move, usually to an industry or location where they can operate at a higher level of economic efficiency

deadweight welfare cost

the cost to society created by market inefficiency

externalities

indirect costs and benefits associated with the production and consumption of certain goods and services that the market fails to take into account

tragedy of the commons

the overuse or destruction of a common property good because it has no price and so markets do not ration its consumption

merit goods

goods and services that are not produced in sufficient quantities by markets because individuals do not value them highly enough to pay for them

asymmetric information

the situation where one party to an economic transaction has more or better knowledge than the other party

demerit goods

private goods with negative externalities

market failure

the inability of the market to determine the use and allocation of resources in the way society most desires, because certain conditions are lacking

public goods

goods or services provided by the government sector for societal use

partial market failure

when markets for goods and services develop but fail to deliver the best outcomes

complete market failure

occurs when a market fails to form

market instability

in all businesses, there are price fluctuations - booms and busts

market concentration

concentration of power of markets with oligopolistic or monopolistic structures, reducing firm competition and abusing market power

free rider problem

When anyone can use public goods as much as they like for free without contributing directly to paying the cost because there is no clearly defined property right or ownership of public goods

market modification methods

Redistribution of income, impose taxes, restrict advertising, introduce legislation, subsides and tariffs, provide essential services

legislative competition policy

Preventing firms obtaining or using excessive market power It protects small businesses, consumers, workers and the public from exploitation and abuse of rights

legislative externalities policy

The government can use direct environmental controls such as monitoring pollution emissions

indirect taxation

is levied on one person and then shifted so it is incident, it is borne by, a different person. Can generate a form of price control to restrict certain market behaviour or provide incentives to maintain competition and improve socially desirable outcomes when partial market failure exists

price floor/ceiling

To correct a perceived market failure of having wage fluctuations and very low-paid workers the government might set a minimum wage above or below the equilibrium wage