ECONOMIC EFFICIENCY IN PERFECT AND IMPERFECT WORLDS

1. ECONOMICEFFICIENCY IN PERFECT AND IMPERFECT WORLDS • Weeks 5 & 6 - four lectures • Frank Stephen Sir William Duncan Building 4.05 E-mail: f.stephen@strath.ac.uk Tel: 0141 548 3862 • Lecture OHPs / quizzes on web site • www.economics.strath.ac.uk/econ101

2. Lecture 9: What is "Efficiency"? • Economic Principle No. 6: “Markets are usually a good way to organise economic activity” • What • Why

3. 'Good Way' • Maximise Benefit from use of Scarce Resources

4. MAXIMISING NET BENEFIT • Benefit of activity • Opportunity cost • Net Benefit

5. Diagram 9.1 Price Demand curve A Net Benefit Supply curve E B Opportunity cost of producing Quantity Benefit of output

6. Diagram 9.2 Price A Net benefit at Q1 Supply E Net loss (Q2 - Qe) Pe B Demand O Q1 Qe Q2 Quantity

7. Net Benefit maximised at Qei.e. where MB = MC • At E: • Output > Qe • Output < Qe

8. SOCIAL SURPLUS • Note the triangle ABE • Part above line • Part below line

9. Consumers’ & Producers’ Surpluses • Consumers' Surplus • Producers' Surplus • Maximising

10. EFFICIENCY • 'property of a resource allocation of maximising the total surplus received by members of society' • Occurs where • Note not concerned