ECON 208 Lecture Notes - Lecture 19: Allocative Efficiency, Marginal Cost, Oligopoly

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ECON 208- Lecture 19- Chapter 12
12.1 Productive and Allocative Efficiency
Full employment of resources does not guarantee efficiency:
Firms may not use least- cost methods of production;
Marginal costs may not be equated from across firms in an industry;
Too much of one product and too little of another product may be produced
Productive Efficiency
Productive efficiency for a firm requires costs to be minimized for any given level of output
Productive efficiency for an industry requires the MC to be the same for every firm
If all industries are productively efficient, then the economy is on the production possibilities
boundary.
Allocative Efficiency
Productive Efficiency and the PPB
The economy is allocatively efficient when p= MC for every product
In order to know which point is allocatively efficient, we need to think about marginal cost and
marginal value in all of the separate markets
Which Market Structures are Efficient?
Profit- maximizing competitive firms are productively efficient.
If they interact in competitive markets, the outcome will be allocatively efficient (p= MC)
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On the other hand, a single- price monopolist is productively efficient, but allocatively inefficient
(since p>MC).
Allocative Efficiency and Total Surplus
Consumer and Producer Surplus in a Competitive Market
Consumer Surplus: Is the area under the demand curve and above the market price line.
Producer Surplus: is the area above the supply curve and below the market price line
The Allocative Efficiency of a Perfect Competition
Allocative efficiency is achieved when total surplus is maximized
This occurs in a perfectly competitive outcome.
The Deadweight Loss of Monopoly
A monopolist generates a deadweight loss by restricting output below the competitive level
The deadweight loss is shown by areas 3+5
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