Transcript Economic Efficiency

Object Of Presentation
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What is market
What is efficiency
Economic efficiency
Details of three conditions
Adam Smith’s Invisible Hand
Other factors for increasing economic
efficiency
What is market
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A market is any mechanism where the sellers
of a particular good or service can meet with
the buyers of that goods and service where
there is a potential for a transaction to take
place. The buyers must have something they
can offer in exchange for there to be a
potential transaction.
What is efficiency
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Efficiency means that the economy’s resources are
Being Used as effectively as possible to satisfy people’s
needs and desires.
For production, economic efficiency means the fixed
amount of commodity produce in minimum price. So in
this condition we can say that the market is efficient. In
the market mechanism the producer wants maximum
profit. That’s why they produce in minimum cost.
The another side of efficiency is that the amount of
production of product should be in a point where the
marginal cost and marginal utility are same.
Economic Efficiency
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Economic efficiency refers to how well productive resources are
allocated with respect to the costs and benefits of using those
resources. One definition of an efficient allocation of resources
is a situation in which all resources are employed and no person
can be made better off by shifting resources from their current
use without making someone else worse off. When government
actions alter the results of a market economy, such actions can
be evaluated in terms of economic efficiency by examining the
additional costs and the additional benefits of the action.
Economic efficiency is improved only if the additional benefits
exceed the additional costs.
An allocation of resources (quantity) is economically efficient
where no reallocation can make one person (human being or
business) better off without making another worse off.
Three sufficient conditions for
economic efficiency
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All users achieve same marginal benefit;
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All suppliers operate at same marginal cost; and
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Every user’s marginal benefit = every supplier’s
marginal cost. When marginal benefit is less than
marginal cost, society overall could gain by
reducing provision of that item, and vice versa.
Another side of efficiency
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The another side of efficiency is that the amount of
production of product should be in a point where the
marginal cost and marginal utility are same.
For production, economic efficiency means the fixed
amount of commodity produce in minimum price. So
in this condition we can say that the market is
efficient. In the market mechanism the producer
wants maximum profit. Thats why they produce in
minimum cost.
Details of three conditions
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Same marginal benefit. If one paper mill gets more profit than
another, the company should switch some wood supplies to
the higher profit mill. Buyer surplus will increase. The
company’s overall profit will be higher.
Same marginal cost. If one forest can produce wood at a
lower marginal cost than another, then the company should
direct the lower cost forest to produce more and the higher
cost forest to produce less. Seller surplus will increase. The
company’s overall profit will be higher.
Marginal benefit = marginal cost. If the marginal benefit of
wood to the paper mills is less than the marginal cost of
production wood, the company should cut back production.
The reduction in benefit would be less than the reduction of
cost. The company’s overall profit will be higher. The sum of
buyer and seller surplus will increase.
Adam Smith’s Invisible Hand
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(a) Perfect competition achieves economic efficiency.
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i. In a competitive market, buyers and sellers acting
independently and selfishly, channel scarce resources into
economically efficient uses (satisfying all three conditions). The
invisible hand that guides buyers and sellers is the market price.
ii. Market prices allocate scarce resources in an economically
efficient way. Prices lead to an efficient allocation of resources
by providing information and incentives:
 (1). Users buy until marginal benefit equals price (to
maximize benefit);
 (2). Producers supply until marginal cost equals price (to
maximize profit);
 (3). Users and producers face same price.
Adam Smith’s Invisible Hand
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b) Market or price system: the economic system in
which resources allocated through the independent
decisions of buyers and freely moving prices. The market
system is more efficient than planning. Under central
planning:
(1). The government or company headquarters about
costs and revenues and decides on production.
(2). Work incentives are generally very weak.
Balancing market power and efficiency
gains
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The antitrust community continues to struggle for the
optimal way to handle such mergers, which can arise
from
large
combinations
in
concentrated
markets--oligopoly.
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Large mergers in concentrated markets that promise
significant efficiency gains, however, have long
perplexed the antitrust enforcement system.
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The enforcement system's ability to evaluate these
difficult mergers depends on three related factors:
decision-making criteria, evaluative techniques, and
workability.
Example
Suppose that the government decides to help consumers by
lowering the price of bread with a subsidy to sellers. The graph
below indicates the effects of this policy. The subsidy makes the
price of bread look higher to sellers, and they produce more. It
makes the price look lower to buyers, and they buy more. Because
both buyers and sellers would appear to be happy with this result,
can we conclude that this subsidy helps the economy? The answer
is a surprising "No."
The key to seeing why the subsidy does not increase value is to
realize what scarcity implies. The production of more bread
requires more resources, and these resources must be drawn from
other uses. To get the extra bread, consumers must do with less
of other goods.
Other factors for increasing
economic efficiency
Promoting the efficient operation of markets to
support growth,
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Removing barriers to global trade etc .
It is a government priority to support a country like UK
to export growth to emerging, high growth markets such
as China, India and Russia, by building better links with
these countries while also making the most of existing
large export markets.
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This is the
end of
presentation