a market that is achieving allocative efficiency must also be achieving productive efficiency. This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you Mini video: Market efficiency, allocative efficiency and productive efficiency. Following along are instructions in the video below:
“Everyone my name is iris. France and today. We are going to talk about market market efficiency. So given the assumption of perfect competition meaning.
We have many buyers and have many sellers then the market outcome will be efficient. So when the market outcome is efficient. It has to satisfy three criteria first is allocative efficiency meaning goods and services are allocated to the buyers with the highest value and the second is productive efficiency. Meaning goods and services are produced by the producers with the lowest cost and three our economic pie.
Meaning the sum of consumer surplus and producer surplus is maximized. So that means you cannot make the economic pie bigger and today. We are going to prove this three criteria. So the first one is allocative efficiency.
Why do we want allocative efficiency. Why do we want goods and services to be allocated to the consumers with the highest value here s the reason because if you have a burger you want someone who is very hungry to obtain the burger and the hungry person will appreciate the burger. Very much contrast to giving the burger to someone who just finished his or her lunch and then that person the second person is not going to appreciate the burger as much as the first very hungry person and therefore allocative efficiency is a good thing now remember your dn curve reflects the willingness to pay of a consumer. So that means that the highest price.
A consumer is willing and able to pay for a product or service. So. Suppose you are dis consumer your willingness to pay is here v. 1.
1. Is higher than p star. So. Because your willingness p is higher than the price.
So you go ahead. And buy the product or the service. How about another consume whose value is v2 well that s still higher than the price. So that consumer will go ahead and purchase the product or the service.
So you buy it you buy it you buy it you buy up to the price now. If your value is lower than the price say if your value is v. 0. That s lower than the price so if your willingness to pay is lower than the price you will not buy it so you can see for all.
The consumers whose value is higher than the price they will go ahead and purchase the product. So i know that goods are being allocated to the consumers with the highest value so we have allocative efficiency and the second criterion is productive efficiency. Meaning goods and services are produced by the producers with the lowest cost so how do i know the market outcome will achieve productive efficiency. So let s take a look at the cost so we know that the supply curve reflects the cost of production to the producers.
So if your cost is say c1. And the cost is lower than the price. So you go ahead and produce that how about if your cost is c. You will still produce that because the cost is still lower than the price.
If you produce that because the c you can go ahead and sell the product or service..
And the price p star. So it is still worth it so you produce it you produce it you could use it you produce it up to the price p star. If your cost is higher than p. Star.
Say your cost is here c. 3. Then it doesn t make sense for you to produce the product anymore because you produce the product at the cost c 3. But if you sell it you can only get p star.
Which is lower than c 3. So you would not produce it so you produce it you produce it produce it up to p star. If your course is hired a piece that you will not produce it so i know that goods and services are being produced by the producers with the lowest cost and we have productive efficiency and the reason why we want productive efficiency is this because we want the cost to be as low as possible think about that s better for the environment. You use less resource to produce the same good you don t want to use a lot of resource and make it very costly and that s what productive efficiency is a good thing and finally the economic pie is maximized so what is our economic pie.
If you remember our consumer surplus and our producer surplus. So the consumer surplus is the area below the demand curve above the price and the base of the triangle will be from zero to the equipment. Quantity. So your consumer surplus will be this triangle on the top and where s your producer surplus your producer surplus is the area below the price above the supply curve so it s like that so it s this triangle and what is your total economic pie your total surplus is consumer surplus plus producer surplus and we know that our total surplus is already maximized you cannot make it bigger.
How do i know let s say. If you produce a different quantity. Say if our quantity is not q star. But q.
One instead then in that case your total surplus will be this trapezoid and this block is lost..
Why is that loss here s a reason on this demand curve. We can see in this particular buyer. His or her value is here v. One and the producer b1.
The producer this producers cost is c1. So v1 is higher than c1 meaning. The buyers value is higher than the sellers cost so any price between this tube will be a mutually beneficial trade and unfortunately. Because you re producing q1.
This trait is lost and that trade. So you can see that there is efficiency lost we call that daily loss. Which is similar to a piece of economic pipe burned in the oven. Meaning your oven is not working.
Very well so you have you bake a piece of pipe and a piece of pipe is lost because it s burnt and we call that very long in economics. So if you change your quantity you make your quantity less than equilibrium quantity. Then we re going to result in very loss and our economic pipe will shrink so you ask what happens if i produce a bigger amount wouldn t that be nice if we produce a quantity that is bigger than q. Star would that be a good thing actually no so suppose you re producing a quantity take youtube that is bigger than equilibrium quantity.
Let s see so you can take a look at that particular unit. The sellers. Cost is here c. 2.
And the buyers value is here v..
2. And you can see clearly the value of the fired v2 is lowered in the cost to the seller c. 2. And therefore you produce this unit.
So the seller will say hey i have to receive at least costs at least the price c 2. For me to sell this unit. Because that s my cost right and the buyer will say no. But you know what my value is only b.
2. So i can t pay you such a high price. So there will be no trade and therefore you produce that actual unit. You ll be wasted.
Because your buyer would not want to buy it the for that will be a loss and that unit to end that unit you so you can see your daily loss will be this triangle and your economic pie will be equal to that big triangle that small triangle. Which will cost you kaname pi to shrink again it s kind of like a piece of pie burning oven. We call that the way laws in economics. So we have proven that efficient market outcome given perfect competition will satisfy these three criteria first allocative efficiency meaning goods are being allocated to the buyers with the highest value second productive efficiency.
Meaning goods are produced by the producers with the lowest cost you use the least resource. So that s great finally we cannot increase economic pie your economic pipe is already maximized meaning any quantity other than equilibrium quantity will cause your economic pie to shrink. So good luck. What you re studying i ll ” .
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