Allocative Efficiency

Transcript:

Allocative efficiency is a point where social welfare is maximized.
Where is this point?
Is it here?
No. hmmm…
Marginal Cost is still lower than Marginal Benefit.
There’s still additional surplus here.
Produce more.
Should we produce further?
Yeah, since MC is still lower than MB.

And we increase production until MC = MB.
Hmm…what happens if we produce beyond this point?
MC is now HIGHER than MB.
We don’t get any more surplus.
We incur more cost.
Arghh… We don’t want that.
Let’s stop production here.

And this point, the market equilibrium point,
is where we get the largest surplus!
We also say that allocative efficiency is achieved when Price = Marginal Cost.
For a competitive market,
The intersection between MC and MB sets the equilibrium price.
Where’s P = MC? Here.
At this point, this is the quantity.
This is the total producer and consumer surplus.
Which is the same triangle!
So allocative efficiency is achieved when P=MC.
Next up: Price elasticity of demand.
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Allocative efficiency is a point where social welfare is maximized. For a competitive market, it is also the market equilibrium point.

In addition, allocative efficiency occurs where price equals to marginal cost (P = MC).