competitive markets allocating resources for efficiency + LS

how is competitive markets and allocative efficiency related?

• buyers and sellers make decisions based on price signals

• at the eq price, the quantity produced = quantity demanded

• companies allocate resources so that the optimum capacity is produced

• products are produced for those who demand it

how is competitive markets and technical efficiency related?

• producers purchase resources of production (land, labor, capital) based on the market

• profit seeking companies seek to reduce costs, so they use low cost factors to improve efficiency and minimize resources used

how is competitive markets and dynamic efficiency related?

• relative price/profits indicate which products are high in demand

• to maximize profits companies will reallocate resources to produce products with higher demand, to make more profit

• encourages consumers to adapt to new conditions of market

how is competitive markets and inter temporal efficiency related?

• Market balances current consumption and savings / investment through the money market and the interest rates.

• Increase in consumer spending and decrease in savings are balanced with higher interest rates

  • the demand for money to invest will surpass the supply of money to invest.

• Decrease in consumer spending and increase in savings are balanced with lower interest rates as there will be an oversupply of money.

• costs relating to the environment are externalized

define market failure

• occurs when a market cannot use resources efficiently

• results in over/under allocation of resources

when does market failure occur

• right combination of products are not produced and are inefficient

• leading to a lack of allocative and dynamic efficiency

• living standards do not increase

• government may intervene to modify policies and improve resource production

what are the major instances of market failure that justify government intervention

1. Public goods

2. Externalities 

3. Asymmetric information 

4. Common access resources 

what are public good and services

• socially desirable or universally acceptable for a community

• should be available for all people

• consumption of product should be associated with positive externalities that benefit third parties (society)

• market should allocate resources to maximize efficiency or increase living standards (social wellbeing)

what’s the difference between public and private goods

• private goods are excludable, if you don’t have money, you cannot buy product

• public goods are non excludable, usually free of charge