Econ Chapt 12 - Economic Efficiency and Public Policy

Terms in this set (45)

Efficiency requires that factors of production be fully employed. However, full employment of resources is not enough to prevent the waste of resources. Even if factors of production are fully employed, they may be used inefficiently.

3 examples of inefficiency in the use of fully employed resources:
1. If firms do not use the least-cost method of producing their chosen outputs, they are being inefficient.
Ex. Firm that produces 30,000 pairs of shoes at a cost of $400 000 when it could have been done at a cost of only $350,000 - the lower cost method would allow the firm to save money
(this example considers the cost for a single firm producing some level of output)

2. If MC of production is not the same for every firm in the industry, the industry is being inefficient.
- ex. last tonne of steel is higher for some firms than others, industry's overall cost is higher than necessary. Same amount of steel could be produced at a lower total cost if output were distributed differently.
(this example is focusted on the total cost for all firms in an industry)

3. If too much of one product and too little of another product are produced, the economy's resources are being used inefficiently.
- shoes and coats example. Lots many shoes are being produced that the value of shoes to consumers are 0. vs too little of coats are being produced that the value of coats to customers are high. Customers can be made better off if resources are reallocated from shoe production to coat production.
(this example relates to the level of output of one product compared w another)