Efficiency & Economic Systems

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Presentation transcript:

Efficiency & Economic Systems AP Microeconomics Unit 1 Stater

Types of Efficiency What is productive efficiency? The production of any combination of goods & services in the least costly way Demonstrated at any point on the PPC

Types of Efficiency But what about allocative efficiency? The least-cost production of that particular mix of goods & services most wanted by society A single point on the PPC (the optimal point) We can make typewriters efficiently, but is it socially optimal to produce a lot?

How do we know when we’re at allocative efficiency? If the marginal benefit of consuming an additional slice of pizza outweighs the marginal cost (to you), you would eat that next slice! But if the cost of the next slice is too great compared to the benefit, you would stop.

Allocative Efficiency occurs… When marginal benefit is equal to marginal cost MB = MC Pizza Slices

The 3 Big Economic Questions… What goods & services will be produced? How will the goods & services be produced? Who will get the goods & services?

Two Major Economic Systems Command System Market System Socialism & communism fall under this Gov’t owns most property and the means of production Gov’t makes most economic decisions through a central economic plan If pure capitalism – laissez- faire Extremely limited role of gov’t Most modern market economies are more of a mixed system with a good amount of government involvement

What is a market? Simply a place where buyers and sellers come together

Characteristics of the Market System Private property Freedom of enterprise & choice Self-interest / Incentives Competition Prices

The “Invisible Hand” (Adam Smith) Competition = method of control for the market system Market prices act as an “invisible hand,” promoting the public interest. Primary motivation = self-interest Industry responds to consumer wants Firms must strive to achieve both productive & allocative efficiency https://www.youtube.com/watch?v=-CqMMxsN_7c

The Circular Flow Model (or Matrix) Two main groups of decision makers: Households Businesses (firms) Government will come in as a decision maker later on Two broad markets: Resource market Where resources are bought and sold Product market Where goods and services produced by businesses are bought and sold

The Circular Flow Model (or Matrix) Watch this ACDC Econ video to see how products, resources, and money flow in a market economy. Draw your own circular flow model in your notes. https://www.youtube.com/watch?v=mN5HPJYJzus