Principles of Economics II 
(Microeconomics)

Efficiency

(2 of 2)

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1. Review
Have you any questions on homework?

2. Course Objectives
Write down the last three course objectives from text page 107:

4.

5.

6.

3. Outline

A. Cost is what the producer pays to produce the good; price is what the producer receives when the good is sold.

B. The opportunity cost of producing another unit of a good is its marginal cost and the minimum price that producers must receive in order to produce the good is at least equal to the marginal cost.

C. As Figure 6.2 shows, the supply curve is the same as the marginal cost (MC) curve because the supply curve shows the minimum price suppliers must receive in order to produce that unit of the good.

D. Producer surplus is the price of the good minus the opportunity cost of producing it. Figure 6.2 demonstrates that producer surplus is the area under the market price and above the supply curve.

A. Figure 6.3 shows that a competitive market is efficient.

1. The equilibrium quantity is 3, as determined by the supply and demand for the product.

2. The efficient quantity is 3, because that is the quantity at which the marginal benefit equals the marginal cost.

3. The sum of consumer surplus plus producer surplus is maximized at the efficient level of output.

B. Adam Smith’s "invisible hand" idea in the Wealth of Nations concluded that competitive markets send resources to where they have the highest value; that is, competitive markets are efficient.

C. Markets may not always be efficient. Reasons why a market may not be efficient are:

1. Price ceilings and floors. Price ceilings and floors can result in underproduction or overproduction.

2. Taxes, subsidies, and quotas. Taxes and quotas can result in underproduction; subsidies in overproduction.

3. Monopoly. A monopoly is a firm that has sole control of a market. Monopolies result in underproduction.

4. Public goods. A public good is a good or service that is consumed simultaneously by everyone, even if they did not pay for it. Public goods result in underproduction.

5. External costs and external benefits. An external cost is a cost not borne by the producer of a product but by others; an external benefit is a benefit enjoyed not by the buyer of a good but by others. External costs can result in overproduction and external benefits in underproduction.

D. Inefficiency, either in the form of underproduction or overproduction, creates a deadweight loss. Deadweight loss is the decrease in consumer surplus and producer surplus that results from an inefficient level of production.

1. Deadweight loss is a loss to everyone in society.

4. PowerPoint Viewgraphs (slides 40 - 46, 47 - 48, 49 - 55)

5. Optional Activity - The Italian Economics Vilfredo Pareto
Your instructor may present a model that demonstrates the meaning of efficiency offered by the economist who taught Adolph Hitler his economics. 

6. Visit www.Econ100.com
This would be a good time to check out some features such as:
Weekly RBL - (reading between the lines)

Weekly quiz

7. Optional Activity - Watch Economics U$A Video #2 Markets and Prices in the PHCC library.

8. Homework
1.  Review Helpful Hints in your study guide.
2.  Complete the even-numbered Questions in your study guide pages 84 - 89 and check your answers on study guide pages 90 - 95.
3.  If you completed the exercise from Pareto, write down the three conditions under which he said resources are used efficiently.
4.  If you watched the Video #2, write one or more sentence about each of its three episodes which will bring the episodes and lessons learned from them to mind.
5.  If not done in class, complete the Two-Minute-Feedback.

9. Summary

Is the Market Efficient?

1.  In a competitive equilibrium, marginal benefit equals marginal cost and resource use is efficient.

2.  If production is less than the competitive quantity, marginal benefit exceeds marginal cost.  If production exceeds the competitive quantity, marginal cost exceeds marginal benefit.  In either case, resource use is inefficient and a deadweight loss arises.

3.  Monopoly restricts production and creates deadweight loss.

4.  A competitive market provides too small a quantity of public goods because of the free-rider problem.

5.  A competitive market provides too large a quantity of goods and services that have external costs and too small a quantity of goods and services that have external benefits.

10. Preview
The chapter on Demand and Supply is one of the key chapters because:
it shows how price and quantity are arrived at by markets;
it is an important graphic model whose principles occur repeatedly throughout the book.

11. Two Minute Feedback
Take a minute and jot down the problem, idea, or concept that was most interesting to you from this chapter.
Take another minute and jot down the problem, idea, or concept with which you struggled the most.
Give the Two-Minute-Feedback to your instructor.

file:  Week 12 Part 2

Love for Econ springs eternal!

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