Allocative Efficiency

• In economics, a free market equilibrium is an efficient allocation of scarce resources, which occurs at equilibrium in a free market.
• The supply curve is equal to the private costs for a firm, which include costs of production such as gas, electricity, wages, rent, and advertising.
• The supply curve is upward sloping due to the law of diminishing marginal returns.
• The demand curve is equal to the private benefit, which are individual consumer benefits.
• The demand curve is downward-sloping due to the law of diminishing marginal utility.
• Social costs are the sum of private costs and external costs, which impact third parties not involved in the transaction or production.
• In a free market operating well, there are no external costs, in which case the marginal social cost is equal to the marginal private cost, which is equal to supply.
• Benefits or impacts could be negative, harming a third party, in which case they are considered negative benefits.
• Net social benefit will occur where MSB equals M must, and both are equal to each other, occurring at equilibrium, M must.
• Net social benefit will occur where MSB equals M must C, and both are equal to each other, occurring at equilibrium, M must C.
• Allocated efficiency is the maximization of net social benefit, which occurs where MSB equals NP B, and is equal to demand, occurring at equilibrium, P star and Q star.
• If allocated efficiency is occurring, these three things in blue will be taking place: maximization of society service, maximization of net social benefit, and maximization of social welfare.
• Any price below P star or above Q star will result in a loss of welfare compared to the size of this triangle.
• Consumer surplus and producer surplus, added together, form the greatest triangle in a free market.
• Net social benefit will occur where MSB equals MF, and both are equal to each other, occurring at equilibrium, MF see.
• Allocated efficiency is the maximization of society service where society surplus is the sum of consumer and producer surplus.
• Net social benefit will occur where MSB equals LS, and both are equal to each other, occurring at equilibrium, LS C.
• Net social benefit will occur where MSB equals LS C, and both are equal to each other, occurring at equilibrium, LS C.
• In a free market, consumption can harm a third party, in which case it is considered negative external benefit, bringing down social benefits compared to private benefits.
• Firms in a free market are assumed to be profit maximizers and consumers are assumed to be utility maximizers.
• The social optimum is where marginal social cost equals marginal social benefit (MSC = MSB), which is the maximization of net social benefit.
• In a free market, equilibrium occurs where quantity supplied equals quantity demanded, also known as the market equilibrium or the private optimum.
• Equilibrium is allocated efficiency if any one of the assumptions break down, which could lead to market failure.
• Equilibrium is the point where quantity supplied equals quantity demanded, also known as the market equilibrium or the private optimum.
• The assumptions that underpin a free market compared to equilibrium include many buyers and sellers in the market, perfect information for both consumers and producers, no barriers to entry, and no barriers to exit.
• The assumptions that underpin a free market compared to equilibrium include many buyers and sellers in the market, perfect information for both consumers and producers
• A free market attains allocated efficiency at equilibrium where resources perfectly follow consumer demand, with no surpluses, no excess supplies, and no shortages.