economic efficiency

• What is the definition of economic efficiency?

  Economic efficiency is when scarce resources are utilized to satisfy infinite human wants.
• What is the relationship between wants and resources in economics?

  Wants are unlimited while resources are limited.
• What does it mean for economic efficiency to exist?

  It means all scarce resources are being used in their best possible way.
• What does economic efficiency represent in terms of the economic problem?


  It represents the best possible solution to the economic problem.
• What are the two conditions for economic efficiency to exist?

  1. Productive efficiency: Products must be made with the least possible scarce resources.
  2. Allocative efficiency: Goods that are most wanted must be produced.
• What is optimum resource allocation?

  It is when both productive and allocative efficiency exist side by side.
• What is the formula for average cost?

  Average cost = total cost / number of units produced
• Where must production take place for productive efficiency?

  Production must take place at the lowest point on the lowest average cost curve.
• What does point 'X' on the average cost curve represent?

  Point 'X' represents technical efficiency.
• How can a Production Possibility Curve (PPC) illustrate productive efficiency?

  • A PPC shows different combinations of two goods that can be produced with fixed resources.
  • Productive efficiency exists at any point on the PPC line.
• What does point 'Y' on the PPC indicate?

  Point 'Y' indicates productive efficiency because the maximum number of goods is being produced with the least amount of scarce resources.
• What does point 'X' on the PPC represent?

  Point 'X' represents productive inefficiency because more can be produced with given resources.
• How does competition between firms lead to productive efficiency?

  Competition leads firms to produce goods at the cheapest possible cost using the least amount of scarce resources.
• What is allocative efficiency concerned with?

  Allocative efficiency is about allocating the right amount of scarce resources to the production of the right goods.
• What does allocative efficiency ensure in terms of consumer satisfaction?

  It ensures producing the right combinations of products that yield the greatest possible satisfaction for consumers.
• When is allocative efficiency said to exist?

  Allocative efficiency exists when the price of the product is equal to the marginal cost of production.
• What is marginal cost?


  Marginal cost is the extra cost of producing one more unit.
• What does the table of quantity, price, and marginal cost illustrate?

  The table illustrates the relationship between output, price, and marginal cost for different quantities produced.
• Why is an output of 1 unit not allocatively efficient?

  Because the cost of producing the product is less than the value placed on it by the consumer.
• Why should 7 units not be produced according to the table?

  Because it costs $8 to produce but the price offered by consumers is $5.
• What is the ideal output for allocative efficiency according to the table?

  The ideal output is 4 units where the price is equal to marginal cost.
• What is required for allocative efficiency to occur?

  A competitive market is required to lead to allocative efficiency.
• What motivates firms to achieve allocative efficiency?

  Firms are motivated by the desire to make the highest profit and to produce goods desired most by consumers.
• What is dynamic efficiency?

  Dynamic efficiency is a form of productive efficiency that benefits the firm in the long run.
• How is dynamic efficiency achieved?

  It is achieved when a firm responds to changing market needs by introducing new production processes.
• What is the effect of dynamic efficiency on costs and output?

  Dynamic efficiency leads to decreased costs and increased output.
• What does Pareto optimality mean?


  Pareto optimality is where it is impossible to make someone better off without making someone else worse off.
• How does operating on the PPC relate to Pareto optimality?

  Operating on the PPC represents Pareto optimality.
• What happens if you produce more of good A according to Pareto optimality?

  If you produce more of good A, you must produce less of good B.