Transcript LESSON 6.3 Market Efficiency and Gains from Exchange

Standard Address
 12.1 Students understand common terms
& concepts and economic reasoning.
6.3 - Objectives
 Distinguish between productive efficiency and
allocative efficiency.
 Explain what happens when government
imposes price floors and ceilings.
 Identify the benefits that consumers and
producers get from market exchange.
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LESSON 6.3
Key Terms
Market Efficiency
and Gains from Exchange
 productive efficiency
 allocative efficiency
 disequilibrium
 price floor
 price ceiling
 consumer surplus
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Competition and Efficiency
Productive efficiency
Making stuff right
Allocative efficiency
Making the right
stuff
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Louis Vuitton vs. Payless
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Model A
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Model T
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Productive Efficiency:
Making Stuff Right
Productive efficiency
occurs when a firm
produces at the lowest
possible cost per unit.
Competition ensures
that firms produce at the
lowest possible cost per
unit.
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Allocative Efficiency:
Making the Right Stuff
Allocative efficiency
occurs when firms produce
the output that is most
valued by consumers.
Competition among sellers
encourage producers to
supply more of what
consumers value the most.
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Checkpoint: pg. 180
Distinguish between allocative efficiency
and productive efficiency.
 Productive efficiency occurs when the
firm produces at the lowest possible
cost per unit.
 Allocative efficiency occurs when firms
produce the output that is most valued
by consumers.
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Disequilibrium
Disequilibrium—a
mismatch between quantity
demanded and quantity
supplied as the market
seeks equilibrium
Disequilibrium is usually a
temporary condition when
the plans of buyers do not
match the plans of sellers.
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Other Sources
of Disequilibrium
Government intervention in the
market
 Sometimes, as a result of government
intervention in markets, disequilibrium can
last a while.
Sometimes the market takes a while
to adjust
New products
Sudden change in demand or supply
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Disequilibrium
A price floor is a minimum selling
price that is above the equilibrium
price.
To have an impact, a price floor must
be set above the equilibrium price.
The Minimum wage is a price floor in the
market for labor.
The government sets the minimum labor
price and no one is allowed to pay less.
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Price Floor
 If a price floor is
established
above the
equilibrium price,
a permanent
surplus results.
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Price Floor
 A price floor
established at or
below the
equilibrium price
has no effect.
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Disequilibrium
A price ceiling is a maximum
selling price that is below the
equilibrium.
To have an impact, a price ceiling
must be set below the equilibrium
price.
The good intensions of government
officials create shortages and
surpluses that often are economically
wasteful.
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Price Ceiling
 A price ceiling is
established below
the equilibrium
price, a permanent
shortage will result.
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Price Ceiling
 A price ceiling is
established at or
above the
equilibrium price,
has no effect.
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Checkpoint: pg. 181
What happens when governments impose
price floors and price ceilings?
 When governments impose price floors or
ceilings:
market prices are distorted and interfere with
the market’s ability to allocate resources
efficiently.
This results in disequilibrium of the market.
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Consumer Surplus
Consumer surplus - is
the difference between
the total amount
consumers would have
been willing and able to
pay for that quantity and
the total amount they
actually do pay.
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An Application of Consumer
Surplus: Free Medical Care
Certain Americans are
provided governmentsubsidized medical
care.
When something is
provided for free, people
consume it until their
marginal benefit is zero.
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Checkpoint: pg. 183
How do consumers benefit from market
exchange?
 Consumers benefit from market exchange
by receiving the goods they demand and
want at a price they are willing to pay.
 When there is a consumer surplus,
consumers pay lower prices than they
would have originally been willing to pay.
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