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Lecture 10 - ECO100 - Introduction to Introduction to...

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CO 100Y ECO 100Y troduction to Introduction to conomics Economics Lecture 10: fficiency and Efficiency and Government Intervention © Gustavo Indart Slide 1
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Productive and Allocative Efficiency ± Efficiency implies both productive efficiency and py allocative efficiency quires that all resources are ± Productive efficiency requires that all resources are used productively to maximize output ¾ That is, it implies technical efficiency and y economic efficiency ± Allocative efficiency requires that the proper output- qp p p mix be produced ¾ That is, it implies a proper allocation of resources © Gustavo Indart Slide 2 among different industries
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Productive Efficiency ± Productive efficiency has two aspects: roduction within each firm ¾ Production within each firm ¾ Allocation of production among firms in an industry roductive efficiency for the firm requires that the firm ± Productive efficiency for the firm requires that the firm produces any level of output at the lowest possible cost ¾ In the long-run, this implies that the firm must choose the least costly combination of the factors of production ± Productive efficiency for the industry requires that marginal cost be the same for all firms ¾ This implies that each additional unit of output must be ppli d b th fir ith th l t r i l t © Gustavo Indart Slide 3 supplied by the firm with the lowest marginal cost
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Productive Efficiency for the Firm A firm is productively efficient hen it minimizes the cost of K when it minimizes the cost of producing any level of output. Cost-minimization implies that p MRTS = w/r. A profit-maximizing firm must be, K* therefore, productively efficient in any and all market structures. Q 1 TC 1 © Gustavo Indart Slide 4 L L*
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Productive Efficiency for the Industry $ $ MC MC Firm A Firm B 80 80 60 60 40 40 20 20 © Gustavo Indart Slide 5 qq q A q B (q A 1) (q B + 1)
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Productive Efficiency for Firms and the Industry If all firms and all industries are productively Y efficient, then the economy is operating on the production possibility curve. A Y A At point B there is inefficiency in production since B Y B more of X and Y can be produced with the same resources. © Gustavo Indart Slide 6 X X A X B
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Allocative Efficiency ± Allocative efficiency relates to the product mix , that is, to the quantities of the various commodities being produced ± The economy achieves allocative efficiency when MC = P for each good produced he demand curve shows the value that consumers assign to ± The demand curve shows the value that consumers assign to each unit of the commodity ¾ That is, P
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