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Efficiency Essay Plan
- Module
- Principles Of Microeconomics
- Institution
- Loughborough University (LU)
Essay plan for an essay on the topic of efficiency of market structures
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Introduction:- 2 components of how socially desirable something is: equity and efficiency
- Define equity (fairness/equality of distribution)
- Define efficiency; allocative and productive efficiency
- Define allocative efficiency; no gains made by reallocating resources as gains are maximised;
P = MC; this is the lowest price at which firms are willing to produce hence gains for
consumers cannot increase to more than that at this point
- Define productive efficiency; for firm it is producing at lowest possible cost for a unit of
product and for market it is where total output in the market is produced at lowest cost
- Pareto optimal resource allocation is where it is not possible to make one person better off
without making another person worse off;
- Pareto improvement allocation is where it is possible to make a person better off without
making another person worse off
- Why do economists mainly focus on efficiency: 1. it is objective and not opinionated 2. We
can make the pie as large as possible then redistribute through use of taxes
Main Body:
- Efficiency of LR equilibrium in perfect comp.
- Many sellers, identical products and low barriers to entry
- Firm is productive efficient as it produces on min point of LRAC
- Firm is allocatively efficient as it produces at P = MC
- Privately efficient at MPB = MPC because if MPB>MPC this means if market produced extra
unit of output then PB would increase by more than PC. Hence as benefit is greater than cost
there would be more private efficiency.
- In a perfectly competitive market there is private and social efficiency as MPC = MSC = P =
MSB = MPB
- All markets are generally privately efficient however are socially efficient if trade has no
impact on a third party i.e. individuals not involved in the transaction
Why is perfect competition socially efficient?
- Demand curve can be thought of as MB curve due to vertical interpretation of demand
curve; for any given output, price is willingness to pay of the consumer willing to purchase
that unit of output; in effect telling how much consumers value consuming that unit of
output
- Supply curve can be thought of as MC curve due to vertical interpretation of supply curve as
it tells us for a given output how much firm is willing to accept to produce that unit; how
much it costs to produce that unit
- Then, if there is no impact of trade on a third party then S = MPC = MSC and D = MPB = MSB
- Pareto improvement to be made by moving to equilibrium if not on equilibrium; losing out
on consumer and producer surplus if not on equilibrium
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