Allocative Efficiency

Week 4

Definition of allocative efficiency

Occurs when there is an optimal distribution of goods and services, taking into account consumer’ preferences.

What is the more precise definition of allocative efficiency?

An output level where the price equals the marginal cost (MC) of production. Because the price that consumers are willing to pay is equivalent to the marginal utility that they get. Therefore the optimal distribution is achieved when the marginal utility of the good equals the marginal cost.

What is a diagram of allocative efficiency?

What is a diagram of allocative ineffiency?

What is the diagram for perfect competition in a firm?

What is the diagram for perfect competition in a industry?

What are monopolies?

Monopolies can increase price above the marginal cost of producttion and are allovatively inefficeint.

Why are monopolies allocatively inefficient?

Because they have market power and can increase price to reduce consumer surplus.

What is a diagram including Supernormal profit and Deadweight welfare loss/

What is productive efficiency?

It is concerned with producing goods at the lowest cost.

Where does productive efficiency occur?

On the production possibility frontier (PPF).

What does PPF show?

The potential output.

What is allocative efficiency concerned with?

The distribution of foods, which requires the addition of indifference curves.