Economics Lecture Notes

One of the most important terms in economics is economic efficiency.

Economic efficiency is the situation where both allocative and productive efficiency are achieved.

Allocative efficiency is a situation where production matches consumer preferences, represented by the supply and demand curve.
$S = MC$ $$S = MC$$ (Supply equals Marginal Cost)
$D = MU$ $$D = MU$$ (Demand equals Marginal Utility)
S = Supply
D = Demand
MC = Marginal Cost
MU = Marginal Utility
Equilibrium is allocatively efficient when the price reflects the marginal utility (satisfaction) of the additional consumer.
Achieved when price is equal to the marginal cost of production.
Marginal utility of a good equals the marginal cost of that good.
Note: The demand curve has no externalities or impact on third parties (e.g., pollution).
Example:
- At an output of 70, the price is £10, which is also the marginal cost.
- At an output of 40, the price is £15, which is greater than the marginal cost of £6, indicating under consumption.
- At an output of 110, the price people are willing to pay is £7, but the marginal cost is £17, which is much greater than the marginal benefit, indicating over consumption.

Government incentives, such as subsidies, can increase the amount of money a business uses in materials and capital, increasing production.
Subsidies can be connected to the number of bicycles produced.
Example: A firm receives £x on producing every 100th bike after the first 2000.
Benefit: Lower unit costs, potentially leading to a fall in the price of bikes and encouraging a rise in demand.

Productive efficiency is a situation where all resources are utilized in the economy to produce as much as possible, as represented by the Production Possibility Frontier (PPF) / Production Possibility Curve (PPC).
Concerned with producing goods and services with the optimal combination of inputs to produce maximum output for minimum cost
To be productively efficient, the economy must be producing on its PPC.
At this point, it is impossible to produce more of one good without producing less of another

A firm is said to be productively efficient when producing at the lowest point of the short-run cost curve.
This occurs at the point where Marginal Cost (MC) equals Average Cost (AC).
$AC = \frac{Total Production Cost}{Total Units Produced}$ $$AC = \frac{Total Production Cost}{Total Units Produced}$$
When the firm benefits from all available economies of scale (as output increases, average cost falls).
Example: Purchasing economies through bulk buying resources, resulting in discounts and a reduction in average cost.
Key Diagram: Economies of scale

With productive efficiency, the firm is benefiting from all available economies of scale (as a firm's output increases, their average cost falls).
Example: Purchasing economies, bulk buying resources resulting in discounts and a reduction in average costs.

A firm can be productively efficient but produce goods that society does not need and is allocatively inefficient.

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Economics Lecture Notes

Economic Efficiency

One of the most important terms in economics is economic efficiency.

Economic efficiency is the situation where both allocative and productive efficiency are achieved.

Allocative efficiency is a situation where production matches consumer preferences, represented by the supply and demand curve.
$S = MC$ (Supply equals Marginal Cost)
$D = MU$ (Demand equals Marginal Utility)
S = Supply
D = Demand
MC = Marginal Cost
MU = Marginal Utility
Equilibrium is allocatively efficient when the price reflects the marginal utility (satisfaction) of the additional consumer.
Achieved when price is equal to the marginal cost of production.
Marginal utility of a good equals the marginal cost of that good.
Note: The demand curve has no externalities or impact on third parties (e.g., pollution).
Example:
- At an output of 70, the price is £10, which is also the marginal cost.
- At an output of 40, the price is £15, which is greater than the marginal cost of £6, indicating under consumption.
- At an output of 110, the price people are willing to pay is £7, but the marginal cost is £17, which is much greater than the marginal benefit, indicating over consumption.

Government incentives, such as subsidies, can increase the amount of money a business uses in materials and capital, increasing production.
Subsidies can be connected to the number of bicycles produced.
Example: A firm receives £x on producing every 100th bike after the first 2000.
Benefit: Lower unit costs, potentially leading to a fall in the price of bikes and encouraging a rise in demand.

Productive efficiency is a situation where all resources are utilized in the economy to produce as much as possible, as represented by the Production Possibility Frontier (PPF) / Production Possibility Curve (PPC).
Concerned with producing goods and services with the optimal combination of inputs to produce maximum output for minimum cost
To be productively efficient, the economy must be producing on its PPC.
At this point, it is impossible to produce more of one good without producing less of another

A firm is said to be productively efficient when producing at the lowest point of the short-run cost curve.
This occurs at the point where Marginal Cost (MC) equals Average Cost (AC).
$AC = \frac{Total Production Cost}{Total Units Produced}$
When the firm benefits from all available economies of scale (as output increases, average cost falls).
Example: Purchasing economies through bulk buying resources, resulting in discounts and a reduction in average cost.
Key Diagram: Economies of scale

With productive efficiency, the firm is benefiting from all available economies of scale (as a firm's output increases, their average cost falls).
Example: Purchasing economies, bulk buying resources resulting in discounts and a reduction in average costs.

A firm can be productively efficient but produce goods that society does not need and is allocatively inefficient.