A8 Price and Economic Efficiency

creative destruction

process by which new products and processes disrupt those that currently exist

how to achieve Pareto-efficiency

achieve both productive and allocative efficiency

allocative efficiency

D=S
P=MC
PS & CS simultaneously maximised
essentially, producers are producing what consumers want to consume

static efficiency

short-run: allocative and productive efficient at same time I.e on PPC

dynamic efficiency

long-run: investment in production process, the product, both results I.e better product over time e.g. iPhone 14>iPhone 11

Pareto-efficient allocation of resources

where it would be impossible to make more of one good/person better off without making less of a second good/a second person worse off

PPC

shows combo of g&s that could be produced if an economy is at full employment and is using all its resources efficiently

Pareto Inefficient

it would be possible to produce more of a good w/o reducing production of the other good

productively inefficient

production not taking place at least cost, if it was there would be increased output

allocatively inefficient

production of the goods demanded by consumers is not taking place, if it was there would be a change in output

productive efficiency

producing at the lowest point of the lowest average cost curve

law of diminishing marginal utility

as you have more of something, you get progressively less and less satisfaction

why do additional units get more expensive as firms make more units?

FoP's get more expensive as they become more scarce

allocatively inefficient

S>D or D>S, disequilibrium, PS>CS or CS>PS

perfectly competitive market features

many buyers and sellers
freedom of market entry and exit
product and factor homogeneity
perfect info
perfect mobility of FoPs

dynamic efficiency results from

innovation

2 types of innovation

product innovation: small-scale and subtle changes to characteristics and performance of a g/s
process innovation: changes to the way in which production takes place or is organised