|
ARE BUSINESSES EFFICIENT?
Again, we return to the central issue
of economics: REDUCING SCARCITY (the 5Es). In lessons 8/9,
10, and 11 we will see if industries are (1) allocatively
efficient, and (2) productively efficient, in the long
run.
This would be a good time to review
the 5Es online reading from lesson 1b and reacquaint
yourself with the definitions and examples of allocative and
productive efficiency. Allocative efficiency means producing
the mix of goods and services that maximize society's
satisfaction and productive efficiency means producing at a
minimum cost.
What else do we know? In lesson 1d we
learned about benefit-cost analysis (marginal analysis).
From lessons 3 and 5 we know that we find the allocatively
efficient quantity where MSB = MSC and where consumer
plus producer surplus are maximized. In lesson 4b we learned
the definitions of short run and long run.
In lessons 8/9, 10, and 11 we will
put all of this together to see if businesses are efficient.
Of course we do not have time to study every individual
business or industry, so we will examine the efficiency of
four groups of industries or the four product market
models.
In lesson 2a we learned that
competitive markets are efficient. In lesson 8/9a we learned
the characteristics of competitive markets and how
competitive businesses find the profit maximizing quantity
to produce (where MR=MC or WHAT WE GET). Here, we will learn
that since there are no barriers to entry in the long run
the competitive markets will produce the allocatively
efficient quantity that people want at the lowest possible
cost (productive efficiency; where MC = ATC). Be sure to see
the last 13 pages of the Unit 3 Yellow Pages ("3 Rules and 4
Models").
Finally, once we learn that the
allocatively efficient quantity occurs where P = MC, we will
look at ways this might be used to improve the allocation of
resources and reduce scarcity. (MC Pricing).
Never forget this: To maximize
profits business will produce the quantity where MR=MC.
|
