Chapter 5: Allocative efficiency

Production Possibility Frontier (PPF)

A curve depicting all maximum output possibilities for two goods given a set of inputs.

Resource Allocation Methods

Various strategies used to distribute resources based on different market conditions.

Market Price

The price at which goods and services are bought and sold in the market, determined by supply and demand.

Majority Rule

A method of allocating resources based on the choice of the majority of voters.

Command Allocation

A method where resources are allocated according to directives from an authority figure.

Contest Allocation

A resource allocation method where winners are determined through a competition.

First Come First Serve

Allocates resources to those who first express interest or demand.

Lottery

Allocates resources randomly among participants through a drawing.

Personal Characteristics Allocation

Allocates resources based on attributes deemed favorable by those in charge.

Force

A method for redistributing wealth or transferring resources, often through coercion.

Marginal Analysis

if the marginal benefit of an action is greater than the marginal cost of the action, then do the action

if the marginal benefit of an action is less than the marginal cost of the action, then do not the action

Marginal Benefit (MB)

The maximum price a consumer is willing to pay for one additional unit of a good.

Marginal Social Benefit (MSB)

The benefit to society from the consumption of an additional unit of a good.

Marginal Cost (MC)

The minimum price a producer is willing to accept for producing one more unit.

Marginal Social Cost (MSC)

The total cost to society of producing one additional unit of a good.

Allocative Efficiency

The optimal distribution of resources in the market such that total surplus is maximized.

Consumer Surplus

The difference between what consumers are willing to pay versus what they actually pay.

Producer Surplus

The difference between the actual price received by producers and the minimum they would accept.

Total Surplus

The sum of consumer and producer surplus; represents overall economic welfare.

Invisible Hand

Adam Smith's concept that individuals pursuing their own self-interest can benefit society as a whole.

Deadweight Loss

The loss of economic efficiency that occurs when the quantity produced is not the allocatively efficient quantity.

Market Failure

A situation in which the allocation of goods and services is not efficient.

Price Regulations

Government-imposed limits on the prices that can be charged for goods and services.

Quantity Regulations

Government restrictions on the amount of a good that can be produced or sold.

Externality

A cost or benefit that affects third parties who did not choose to incur that cost or benefit.

Public Goods

Goods that are non-excludable and non-rivalrous, often leading to underproduction.

Common Resources

Resources that are non-excludable but rivalrous, often leading to overuse.

Monopoly

A market structure where a single seller dominates the market, resulting in reduced production.

High Transaction Costs

Costs that make market transactions less efficient, often leading to underproduction.

Surplus

The amount by which the quantity supplied exceeds the quantity demanded, leading to economic inefficiency.

Efficiency

A condition in which resources are allocated in a manner that maximizes total surplus.

Subsidy

Financial support extended by the government to encourage production of certain goods.

Tax

A compulsory contribution to state revenue, which can influence supply and demand.