SIMON FRASER ECON290 Lecture Notes - Efficiency

SIMON FRASER ECON290 Lecture Notes - Efficiency -...

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Efficiency (Pareto Efficiency): Resources are allocated such that there is no way to make at least one person better-off without reducing the well-being of any other person. Notes: (1)Pareto efficiency is a very weak evaluation criterion. It says nothing about distribution. It cannot be used to rank allocations. (2)aka “Big Pie Theory”, making economic pie as big as possible. No waste in consumption and production. (3)Individuals should be allowed to engage in mutually beneficial trades. 1
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2 × 2 × 2 economy: 2 consumers (A and B) 2 goods (Food, and Clothing) 2 inputs (Labor and Capital) 1. Efficiency in Production Technology: F=F(L F , K F ) C=C(L c , K c ) L F +L C =L K F +K C =K Isoquant: The set of all possible combinations of 2 inputs that are just sufficient to produce a given amount of output. L K F=40 F=25 MRTS (Marginal Rate of Technical Substitution): The rate at which the firm has to substitute one input for another in order to keep output fixed. MRTS measures the trade-off between two inputs in production. It is the slope of isoquant. The graphical tool we are using to determine the productive efficiency condition is called Edgeworth Box . 2
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SIMON FRASER ECON290 Lecture Notes - Efficiency -...

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