Economics Lecture Notes

Vocabulary flashcards based on economics lecture notes covering efficiency, incentives, and production possibilities.

Economic Efficiency

The situation where both allocative and productive efficiency are achieved.

Allocative Efficiency

Situation where production matches consumer preferences (supply-demand curve).

Productive Efficiency

Situation where all resources are utilized in the economy to produce as much as possible (PPF/PPC Curve).

Dynamic Efficiency

Efficiency achieved through Research & Development.

Allocative Efficiency Condition

Occurs when S=MC and D=MU, where S is supply, MC is marginal cost, D is demand, and MU is marginal utility.

Incentive (Economics)

A factor (like subsidies) that motivates a business to increase production.

Government Subsidies

Can incentivize a business, increasing the amount of money for materials and capital, leading to increased production.

Impact of Subsidies

Lower unit costs potentially lead to a fall in the price of goods and encourage a rise in demand.

Allocative Efficiency (Price)

Achieved when price is equal to the marginal cost of production (MC).

Allocative Efficiency (Marginal)

Marginal utility of a good equals the marginal cost of that good.

Externalities

The demand curve assumes no externalities (impact on third parties), e.g., pollution.

Over Consumption

Occurs when the price people are willing to pay is much greater than the marginal benefit.

Productive Efficiency

Producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost.

Productive Efficiency (PPC)

To be productively efficient, the economy must be producing on its PPC (Production Possibility Curve).

Productive Efficiency (Trade Off)

At the PPC, it is impossible to produce more of one good without producing less of another.

Productive Efficiency & Short Run Average Cost

A firm is productively efficient when producing at the lowest point of the short-run cost curve where MC = Average Cost.

Economies of Scale

With productive efficiency, the firm is benefiting from all available economies of scale (as output increases, average cost falls).