Study for Economics Term 3 Exam
Different Types of efficiencies
ALLOCATIVE EFFICIENCY is achieved when resources go to the production of good and services that consumers want the most. This is called the socially optimal level of output. It is about what consumers want, not about what the business thinks the consumers want or what the business wants. Production of a good should continue while the benefits to consumers are greater than the cost of producing the next unit.
DYNAMIC EFFICIENCY recognises that variables are not held constant as there are always changes in production and resource use bought about due to new methods and technologies. IMPERFECTLY COMPETITIVE MARKETS can benefit dynamic efficiency due to large businesses, because large businesses have the EOS and the revenue (money) to increase innovation and to demand new technologies. 
PRODUCTIVE EFFICIENCY refers to a situation when a business uses resources in a way where output is maximised and they are able to achieve quality within a given amount of hours (In other words, using the same amount of input to create a greater amount of output.
In terms of the Production Possibility Curve, Productive Efficiency happens when an economy is producing on any point on the curve
Production Possibility Curve
It shows when an economy is efficient in any regard. It is represented by a curve and an economy is represented by a dot. If the dot lies on the curve, it is at maximum efficiency. If it is below the curve, it is inefficient. A point lying outside the curve is unattainable for the time being, but is attainable in the future with innovation and increase in factors of production.
HOW DOES AN ECONOMY ACHIEVE PRODUCTIVE EFFICIENCY?
Produce a combination of production using available resources
Produce at its lowest cost
DEFINITION OF PRODUCTIVITY: productivity = the rate of output per unit
SPECIALISATION helps to increase the productivity of your business 
SPECIALISATION of LAND: producing just one type of agricultural product.
SPECIALISATION of LABOUR: where production is broken down into many separate tasks (DIVISION OF LABOUR)
SPECIALISATION of CAPITAL: large scale production using high tech machinery rather than labour. IT ALLOWS FOR ECONOMIES OF SCALE.
SPECIALISATION of ENTERPRISE: High knowledge and skills in a particular area.
GAINS FROM SPECIALISATION
Higher Output
Variety
A bigger Market
Competition and lower prices
Allocative efficiency is achieved when MU = MC (Marginal utility = Marginal cost).
IN ORDER TO GET FURTHER FROM THE CURVE:
A country would require an increase in factor resources, an increase in the productivity or an improvement in technology.
Trade between countries allows them to consume beyond their PPC
Producing more of both goods would represent an improvement in welfare and a gain in ALLOCATIVE EFFICIENCY
PARETO EFFICIENCY is a term used to relate to ALLOCATIVE EFFICIENCY. It states that when the allocation of resources is at its optimal level; the only way for a person to become better off is if someone else gets worse off (AKA, moving to a different point on the PPC). The world is a ZERO SUM GAME.
PARETO EFFICIENCY AND EQUALITY
An outcome may be a Pareto improvement, but it doesn't always mean this is a satisfactory outcome or fair.
There could still be inequality after a Pareto improvement
BENEFITS
Lower production costs
Increase in productive efficiency (more efficient use of resources)
Increase allocative efficiency (consumer needs are met)
Glossary
MARKET EQUILIBRIUM
EXTERNALITIES
INCENTIVES
FULL MARKET FAILURE
GOODS (PUBLIC, PRIVATE, MERIT AND DEMERIT
TRAGEDY OF THE COMMONS
PARTIAL MARKET FAILURE
ECONOMIC CYCLE
ECONOMIC CYCLE / BUSINESS CYCLE (TRADE CYCLE)
DEMERIT GOOD
MERIT GOOD
MARKER FAILURE (When supply and demand are not the same). It refers to he inability of the market to efficiently allocate resources in the optimal manner for society.
1. FULL/PARTIAL
2. CAUSES
- EFFECTS (EXTERNALITIES)
FURTHER INFO: In the market economy the price mechanism - supply and demand - determines the economic questions of:
What will be produced
how much will be produced
and the price
FOR THE MARKET TO WORK
There needs to be defined property rights (eg. the right to own and dispose of property, the right to use the property).
The prices of products & resources take into account all of the costs and all of the benefits (social & private, current & future) involved in the production and use of the products and resources.
Both producers and consumers must be well informed about the consequences of their decisions and actions.
FULL MARKET FAILURE occurs when the market simply does not supply products at all. This leaves an unmet desire in society for a particular product that was not supplied.
It occurs because there is no profit incentive for private producers to supply the good / service if it is a public good. They are unable to exclude non-payers from using the good / service.
Here there is a 'free rider' problem because there are no defined property rights or defined ownership of the public good.
EXAMPLES OF PUBLIC GOODS
Police
defence
beach
parks
highways
DIFFERENCE BETWEEN PRIVATE AND PUBLIC GOODS
PUBLIC (non rival and non excludable)
NON RIVAL means that my consumption does not affect you consumption of a good. IT DOES NOT GET USED UP BY ONE OR A FEW PEOPLE.
NON EXCLUDABLE means that I cannot prevent you from consuming a good.
In other words, people have a sort of right to these goods, and some of them can be of benefit to people who don't pay for the good.
QUASI-PUBLIC GOODS are goods that provide benefits to the public, but could theoretically be restricted if necessary. This is how they differ from TRUE PUBLIC GOODS. An example of a Quasi-Public Good would be a road, because they could be restricted with the use of a tool system.
PRIVATE (rival and excludable). For example, my computer. There is a limited supply, so buying one limits the amount left for my rivals. I also don't have to allow anyone else to use it.
MERIT GOOD - a private good with positive externalities. When consumer, a merit good creates positive externalities since the public benefit is greater than the private benefit. However, as consumers only take into account private benefits when consuming merit goods, it means that they are under-produced.
For example, Goods or services (such as education and vaccination) are provided free for the benefit of the entire society by a government, because they would be under-provided if left to the market forces or private enterprise.
DEMERIT GOOD - a private good with negative externalities. It is a "good or service whose consumption is considered unhealthy, degrading or otherwise socially undesirable due to the perceived negative effects on the consumers themselves". It is over-consumed if left to market forces. Governments will often levy taxes on these goods, regulate or ban consumption or advertisement.
Tobacco
Alcohol
Recreational drugs
Gambling
Junk food
Prostitution
PARTIAL MARKET FAILURE occurs when the market does actually function, but it produces either the wrong quantity of a product or at the wrong price.
Why? Because not all costs or benefits are taken into account
Therefore, some markets do not allocate resources efficiently.
The distribution of some output may exclude members of the community (price level)
The distribution of income may be viewed by the community as inequitable.
Some desired output by the community is not produced in sufficient quantity
Market power can limit the benefits of competition (eg Monopoly)
Fluctuations in the economic cycle impact on the community in different ways.
1. NEGATIVE EXTERNALITIES (e.g. the effects of environmental pollution) causing the social cost of production to exceed the private cost.
2. POSITIVE EXTERNALITIES (e.g. the provision of education and health care) causing the social benefit of consumption to exceed the private benefit.
3. IMPERFECT INFORMATION or INFORMATION FAILURE means that merit goods are under-produced while demerit goods are over-produced or over-consumed.
4. The private sector in a free-markets cannot profitably supply to consumers PURE PUBLIC GOODS and QUASI-PUBLIC GOODS that are needed to meet people's needs and wants.
5. MARKET DOMINANCE BY MONOPOLIES can lead to under-production and higher prices than would exist under conditions of competition, causing consumers welfare to be damaged.
7. Equity (FAIRNESS) ISSUES. Markets can generate an 'unacceptable' distribution of income and consequent social exclusion which the government may choose to change.
6. FACTOR IMMOBILITY causes unemployment and a loss of productive efficiency.
Externalities arise whenever the market creates benefits or costs on a third party ie a party other than the consumer or producer. In both cases, negative and positive externalities, the market has failed to correctly portray the real costs and real benefits to firms and consumers, resulting in either the over-production or under-production of goods at the wrong price.
The market has failed to optimally allocate resources.
EXAMPLES
Have you ever consumed a good where someone else (who didn't pay for the good) also received benefits from your consumption? E.g. watching fireworks.
Have you ever consumed a good where your consumption had a negative effect on others? E.g. smoking in the presence of others, playing loud music.
SHOULD THE COSTS OF EXTERNALITIES BE INTERNALISED INTO THE PRICE MECHANISM?
PRICE MECHANISM
ENVIRONMENTAL ECONOMISTS
When crude oil is taken from an oil well, it carries with it the capacity to c...
POSITIVE EXTERNALITIES: Under-Provision of Public/Merit Goods
A merit good is a good which has positive externalities and is where individual consumption benefits others in society. The good is usually under-consumed / under provided in the market place under the price mechanism due to consumers under estimating or ignoring the social benefits e.g. education or health insurance.
The fundamental premise of a merit good is that it provides some kind of merit (highly beneficial, significant value) to society as a whole, but is often under consumed by individuals in society.
EXAMPLE: Education is considered one of the most vital merit goods of society as it increases not only efficiency in labour output, but also decreases government spending on welfare, crime and healthcare which allows government expenditure on other areas such as infrastructure, education, defence etc. Education is a good which is grossly undervalued in many developed countries with tax-funded (public) schooling. This maybe due to the good not having to be paid in full by its consumers and/or society's short-sightedness to pay for something that consumers cannot see the immediate benefits of.
*GRAPH 5.17 GOES HERE
For markets to function efficiently it is assumed that consumers and producers have perfect knowledge. If this was the case, then we can make informed decisions to gain the most optimal outcome. However, in reality, this is not the case. Why? Business aims to maximise profits, not maximise consumer value or the environment. Why do businesses use so much plastic even though it is non biodegradable?
A public good is non rival and non excludable. Therefore, a price cannot be placed on a public good as non-payers cannot be excluded. e.g parks, beach, fresh air. Natural resources become like public goods where everyone benefits when they are provided. Consumption by one person does not reduce the amount available to another person. Therefore, it is difficult to exclude non-payers from using public goods. Many in society, in Australia and overseas, would claim the right to enjoy the benefits of the natural environment - rural scenery, non-polluted rivers, beaches, pristine views, etc. Few people would be willing to pay for the right if they knew they could not be excluded from the benefits. They would also be unwilling to pay if, having paid for the right, they thought they could not fully exercise that right
A low of power in a few companies (high market concentration of market power) decreases competition in the economy and results in higher prices. Less competition also reduces the need to minimise costs (therefore more wastage, less efficient).
Specialisation allows a country to take full advantage of its resources and to use them as efficiently as possible. Modern