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Ch 5 Efficiency and Equity

# Ch 5 Efficiency and Equity - Efficiency and Equity Chapter...

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Efficiency and Equity Chapter 5 1

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Efficiency Allocative Efficiency: resources are used where they are the most highly valued What measures value? Demand = Marginal Benefit What measures the value of the best alternative? Supply = Marginal Cost (Opportunity Cost) 2
Efficiency If MB > MC then we purchase more of the good and quantity rises (value here > value of alternative) If MB<MC then we purchase less of the good, quantity decreases If MB = MC then Q stays constant Consider D: Qd = -1/2 *P + 6 3 At Q=3, MB=\$6 MC=\$3.50 MB>MC → ↑Q to get allocative efficiency At Q=5, MB=\$2 MC=\$4.50 MB<MC → ↓Q to get allocative efficiency

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Efficiency Key Points At any quantity different then the equilibrium quantity (Q*) we need to either decrease or increase Q to become more efficient. This results in only one point that does not require movement to be efficient— Equilibrium Thus, Allocative Efficiency only occurs at equilibrium where Qd = Qs and MC = MB This is also the point at which total surplus is 4
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Ch 5 Efficiency and Equity - Efficiency and Equity Chapter...

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