2.6 Market Efficiency and Welfare

• Market efficiency refers to how well a market allocates resources to maximize overall welfare
• Market efficiency has two primary aspects: allocative efficiency and productive efficiency.
• Allocative efficiency is achieved when resources are allocated to their most valued uses
• Allocative efficiency occurs when the price equals the marginal cost of production.
• Allocative efficiency maximizes the sum of consumer surplus and producer surplus
• What is productive efficiency achieved when goods are produced using the fewest resources?

  Lowest possible cost
• Productive efficiency occurs at the minimum point on the average total cost curve.
• Together, allocative and productive efficiency ensure markets meet consumer preferences and maximize overall economic welfare
• Allocative efficiency occurs when the price equals the marginal cost of production.
• Productive efficiency occurs when production is at the minimum point on the average total cost
• Allocative and productive efficiency together maximize overall economic welfare.
• Allocative efficiency maximizes the sum of consumer and producer surplus.
• What ensures that markets provide goods and services at the lowest cost to consumers?

  Allocative and productive efficiency
• Allocative efficiency is achieved when resources are allocated to their most valued uses.
• Productive efficiency is achieved when goods and services are produced using the fewest possible resources
• Match the efficiency type with its definition:

  Allocative Efficiency ↔️ Resources allocated to most valued uses

  Productive Efficiency ↔️ Goods produced at lowest cost
• What is consumer surplus defined as?

  Willingness to pay minus market price
• Willingness to pay is the maximum price a consumer is willing to pay for a good or service.
• Consumer surplus equals willingness to pay minus market price
• A higher consumer surplus indicates greater satisfaction for consumers
• What is producer surplus defined as?

  Market price minus cost of production
• Cost of production is the minimum price producers need to cover their costs.
• Producer surplus equals market price minus cost of production
• What does a higher producer surplus indicate?

  Greater profitability for producers
• Total surplus is the sum of consumer surplus and producer surplus.
• The formula for total surplus is consumer surplus plus producer surplus
• Total surplus is the sum of consumer and producer surpluses
• What does total surplus represent in a market?

  Total benefit or welfare
• The formula for total surplus is consumer surplus plus producer surplus
• Consumer surplus is the area above the market price and below the demand curve.
• Match the surplus type with its definition and formula:

  Consumer Surplus ↔️ Benefit consumers receive from lower prices ||| $\frac{1}{2} \times (\text{Demand Price} - \text{Market Price}) \times \text{Quantity}$

  Producer Surplus ↔️ Profit producers gain from selling above cost ||| $\frac{1}{2} \times (\text{Market Price} - \text{Supply Price}) \times \text{Quantity}$

  Total Surplus ↔️ Sum of consumer and producer surpluses ||| $\text{Consumer Surplus} +$$\text{Producer Surplus}$
• Allocative efficiency occurs when the price equals the marginal cost of production.
• Productive efficiency is achieved when goods are produced at the minimum point on the average total cost
• What are the two primary aspects of market efficiency?

  Allocative and productive
• Allocative and productive efficiency together maximize overall economic welfare.
• Consumer surplus is the difference between willingness to pay and the market price
• The cost of production is the minimum price producers need to cover their expenses.
• What does total surplus represent in a market?

  Total welfare
• The formula for total surplus is consumer surplus plus producer surplus
• Market equilibrium is achieved when quantity demanded equals quantity supplied.