AS LEVEL MICROECONOMICS EFFICIENCYBrought to you by Curious

AS LEVEL MICRO-ECONOMICS -EFFICIENCYBrought to you by Curious. Economics

Allocative Efficiency Allocative efficiency is where consumer satisfaction is maximised. Scarce resources are used to produce goods and services consumers actually demand. The market must be at the equilibrium position to achieve allocative efficiency. Efficiency occurs in a market where the best use is made of all available resources. Factors of production must be fully employed to meet customers needs, and the prices charged should be at the lowest level. Price S Only at Q 0/P 0 is allocative efficiency achieved, providing maximum consumer satisfaction. P 2 P 0 P 1 D Q 1 Q 0 Q 2 In practice, markets do not work efficiently as what consumers want isn’t always produced in the right quantities. As a result, there is market failure………

Productive Efficiency Productive efficiency: where production takes place using the least amount of scarce resources possible. Only at point X is production productive efficient. This is because output of the two goods is maximised so resources are efficiently allocated, and production takes place using the least amount of scarce resources possible. Good A X Y Good B Position Y is inefficient as more could be produced using the available resources.

Economic Efficiency and Market Failure Economic Efficiency: where both productive and allocative efficiency are achieved. Market Failure: where the free market mechanism fails to achieve economic efficiency. Free Market Mechanism: the system by which the market forces of demand supply determine prices and the decisions made by firms and consumer. If economic efficiency is not achieved then there is market failure. There a whole range of market failures: Information Failure Public Goods Market Failure Merit and Demerit Goods Externalities