Module 6.5 Marker Efficiency Part 2 Lecture (copy)

Market Efficiency and Allocation

• Markets are efficient in allocating goods, producing where marginal benefit equals marginal cost.

• Voluntary exchanges that benefit participants occur, while wasteful exchanges are avoided.

• Goods are allocated to those with the highest willingness to pay, reflecting the greatest marginal benefit.

Seller Dynamics in Competitive Markets

• Key question: Who are the sellers in the market?

• In competitive markets, the supply curve represents the marginal cost curve for producers.

• Example: Two taco producers - The Cabana (a major chain) and The Truck (a smaller scale producer).

Production Capacity

• The Cabana:

  • Scalable production capabilities, resulting in lower incremental costs.

  • Supplies:

    • $2 price: 500 tacos

    • $3 price: 700 tacos

    • $4 price: 1000 tacos

• The Truck:

  • Limited space makes scaling difficult, leading to higher marginal costs eventually.

  • Supplies:

    • $2 price: 100 tacos

    • $3 price: 200 tacos

    • $4 price: 250 tacos

Marginal Cost Principles

• Supply curves slope upwards due to increasing marginal costs with production expansion.

• At equilibrium price of $3:

  • Cabana: 700 tacos

  • Truck: 200 tacos

• Inquiry about cheaper taco production leads to exploring adjustments in production distribution.

Analyzing Production Changes

• If we increase Truck's production by 50 tacos, while decreasing Cabana's by 50, total production remains 900 tacos.

  • However, the truck's marginal cost may exceed $3, influencing costs adversely.

• This scenario illustrates wastefulness in resource allocation.

Cost Implications of Allocation Adjustments

• Increasing Cabana's output (beyond 700) entails rising marginal costs exceeding $3.

• Reducing Truck's output (below 200) results in lower marginal costs under $3.

• Any other production strategy except for equilibrium will elevate costs:

  • Leading to inefficient production outcomes and wasteful resource allocations.

Conclusion: Competitive Markets and Efficiency

• Competitive markets achieve:

  • Allocative Efficiency: Goods distributed to consumers with the highest marginal benefit.

  • Productive Efficiency: Goods produced at the lowest possible cost.

• Mutual exchanges manifest unplanned (the Invisible Hand):

  • Consumers act based on marginal benefit from their willingness to pay.

  • Producers respond to marginal costs via their willingness to accept.

• Overall, these self-interested actions lead to efficient market outcomes.