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Economic Efficiency Final Exam Essay

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Economics

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Economic Efficiency:
For an economic efficiency to occur goods and services need to be produced
using the least amount of resources as possible, and with a stated quality (Engineering
Efficiency), and this is not enough, for these goods and services to be economically
efficient resources must be allocated to satisfy society’s wants as fully as possible.
FIRMS:
Firms are profit maximizers, which means all firms allocate their resources to
achieve maximum profit, and produce what consumer want, or else they will not be able
to sell their output “outputs are optimized as per consumer preferences and taste”.
In the other hand in competitive market for factor inputs, firms will hire resources
up to the point where Price/ Wage = Value Of Marginal Product (VMP) for the factor
input, and the demand for the factor input is dependent on the demand of the Final
goods and services it produces.
This is why a scarce talent gets high Wage/income, for example a famous singer
command high economic rent, in the same time receives high income because of the
high demand on his scarce talent.
Households:
Households are profit maximizers as well, since they allocate their income so that


=

  for all their expenditure, so that the last $ spent on good a return
the same utility as the last $ spent on good b, c and so on.
If in any case


>

then the law of diminishing marginal utility kicks
in to adjust any imbalance, as the increase in the consumption of a good will decrease
the utility received for each unit consumed, and we will be back to balance and
economic efficiency.

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Opportunity Cost:
People will choose their education based on factors like skills, talents and
“Opportunity Cost”, Doctor Vs. Technician, a doctor is better paid but on the other hand
the time and money invested in a doctor is much more than that in a technician, and the
market will reward people based on their skills, how scarce are their skills, and what is
the demand on that skill.
Marginal Equivalency Conditions (MEC):
Since competitive firms are price takers P (Price) = MC (Marginal Cost), so




=


, the MEC is in Equilibrium and the Economic efficiency prevails.
In real world MEC may never be attained but it is where the economy is heading,
though market is not always perfect for the following reasons:
Information may be missing
New goods and services constantly introduced in the market
Technological changes
Exogenous shocks
Imperfection of the market system:
o Public goods
o Externalities
o Economies of scale
o Distribution of income
Each of which require government intervention to restore economic efficiency
Government intervention can be through the following:
Direct legislation: imposing a tax or subsidy, or laws and
regulations to bring the economy to the point of economic efficiency
(ex: to make the producer bare the societal cost not only the private
one in the case of negative externality )
Indirect Legislation: through defining clear property rights for the
externalities.
Internalize the externality (when external cost or benefit are brought
within the scope of single organization)

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Economic Efficiency: For an economic efficiency to occur goods and services need to be produced using the least amount of resources as possible, and with a stated quality (Engineering Efficiency), and this is not enough, for these goods and services to be economically efficient resources must be allocated to satisfy society’s wants as fully as possible. FIRMS: Firms are profit maximizers, which means all firms allocate their resources to achieve maximum profit, and produce what consumer want, or else they will not be able to sell their output “outputs are optimized as per consumer preferences and taste”. In the other hand in competitive market for factor inputs, firms will hire resources up to the point where Price/ Wage = Value Of Marginal Product (VMP) for the factor input, and the demand for the factor input is dependent on the demand of the Final goods and services it produces. This is why a scarce talent gets high Wage/income, for example a famous singer command high economic rent, in the same time receives high income because of the high demand on his scarce talent. Households: Households are profit maximizers as well, since they allocate their income so that 𝑀𝑢 𝑀𝑢 𝑎 = 𝑃 𝑏= 𝑃 𝑐 …. for all their expenditure, so that the last $ spent on good a return 𝑃 the same utility as the last $ spent on good b, c and so on. 𝑀𝑢 𝑀𝑢 𝑀𝑢 𝑀𝑢 If in any case 𝑃 𝑎 > 𝑃 𝑏> 𝑃 𝑐 then the law of diminishing margin ...
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