ECO440H5 Chapter Notes -Microeconomics, Sexually Transmitted Infection, Pareto Efficiency

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15 May 2014
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8. 1 adding up costs and benefits: the need for a conceptual basis. Efficiency in exchange: in a world of two individuals and two goods, individuals will trade the goods in order to maximizr the utility. They will do this until the marginal rate at which they are willing to substitute the goods (marginal rate of substitution, mrs) is equal to the ratio oif the prices of the goods. Thus, for efficient exchange, for any two individuals and any two goods. Efficiency in production: in a world of two factors of production, say equipment (k) and labor (l), production is efficient when the cost of the inputs is the lowest possible. Keeping output constant we can vary the proportions of equipment and labor. In most societies most goods and services are allocated through market processes. Using market mechanisms may remain the best available option even when the conditions for perfect markets are violated.

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