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Understanding Resource Allocation Efficiency

The document discusses efficient allocation of resources and how marginal benefit and marginal cost determine incentives to produce more or less of an activity. It also discusses consumer surplus, producer surplus, and how the sum of the two is maximized at the efficient quantity.

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2 views2 pages

Understanding Resource Allocation Efficiency

The document discusses efficient allocation of resources and how marginal benefit and marginal cost determine incentives to produce more or less of an activity. It also discusses consumer surplus, producer surplus, and how the sum of the two is maximized at the efficient quantity.

Uploaded by

Tik Tok
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Efficient allocation of resources

• Efficient Allocation of resources occurs when we produce the goods and services that people
value most highly.

The benefit from pursuing an incremental increase in an activity is its marginal benefit.

The opportunity cost of pursuing an incremental increase in an activity is its marginal cost.

• MB exceeds MC

• MC exceeds MB

• MB equals MC

For any activity, if marginal benefit exceeds marginal cost, people have an incentive to do more of that
activity.

If marginal cost exceeds marginal benefit, people have an incentive to do less of that activity.

The Value of one more unit of good or service is its marginal benefit. MB can be expressed as the
minimum price that people are willing to pay for another unit of good or service.

• Consumer Surplus is the Price consumer is willing to pay (value of good) minus the actual price
paid for it.

• Market price for a good is $15.

• Minimum Supply price

• A supply curve is Marginal cost curve for a producer.

• Producer Surplus is the actual price of a good minus minimum price he is willing to charge from
customers.

Consumer surplus is the area below the demand curve and above the price.
Producer surplus is the area below the price and above the supply curve.

The sum of the two surpluses is maximized and the efficient quantity is produced.

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