1. Efficiency & Economic Systems
AP Microeconomics
Unit 1
Stater

2. 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

3. 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?

4. 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.

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

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

7. 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

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

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

10. 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

11. 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

12. 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.