Post on 21-Jan-2016
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12.1 Students understand common terms & concepts and economic reasoning.
Standard Address
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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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© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 6.33
LESSON 6.3
Market Efficiency and Gains from Exchange productive efficiency allocative efficiency disequilibrium price floor price ceiling consumer surplus
Key Terms
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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
CONTEMPORARY ECONOMICS: LESSON 6.35
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Model A or Model T
CONTEMPORARY ECONOMICS: LESSON 6.36
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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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Distinguish between allocative efficiency and productive efficiency.
Checkpoint: pg. 180
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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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.
Checkpoint: pg. 181
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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 government-subsidized medical care.
When something is provided for free, people consume it until their marginal benefit is zero.
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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.
Checkpoint: pg. 183