Economic Efficiency

Today students will learn how economic efficiency is composed of productive efficiency and allocative efficiency.

We will use perfect competition and imperfect competition to see when each type of efficiency can occur.

By the end of the lesson, students should be able to identify both types of efficiency on an economic diagram.

Quick Dictionary

Supply (供应) Quantity producers are willing to sell at a given price.

Demand (需求) Quantity consumers are willing to buy at a given price.

Equilibrium (均衡) Where supply equals demand; market clears.

Allocative Efficiency (分配效率) Resources allocated to produce what society values most (P = MC).

Productive Efficiency (生产效率) Production at the lowest possible average cost (minimum ATC).

Perfect Competition (完全竞争) Many firms, identical products, no barriers to entry, price takers.

Price Taker (价格接受者) Firm that must accept the market price; demand is perfectly elastic.

MC (边际成本) Marginal Cost — the cost of producing one additional unit.

ATC (平均总成本) Average Total Cost — total cost divided by quantity produced.

Economic Efficiency (经济效率) When both allocative and productive efficiency are achieved simultaneously.

From Demand to the Market

Previously we built demand. Then we added supply. Together they form the market supply-and-demand model.

Demand 0

Supply 0

One Market Price

Jason is one store out of 1,000 stores selling the same product. Customers know this and will buy from another store if Jason makes his price too high or lower than everyone else.

Market Price: $35

✅ Economic Efficient

Directions & Questions

Review the tasks for each part of the lesson. Complete these on your paper.

Box 1 Draw: Draw the supply and demand diagram shown on the screen. Label the axes (P, Q), curves (D, S), equilibrium price (P*), and equilibrium quantity (Q*).

Box 2 Explain: Explain what happens at the equilibrium point. Why is this point often referred to as the "market clearing" price and quantity?

Box 3 Draw - Market Original: Draw the market supply and demand diagram. Label the initial equilibrium price (P*) and quantity (Q*).

Box 4 Draw - Firm Original: Draw Jason's firm diagram. Show his horizontal demand curve at P*. Draw his supply (MC) curve and label the profit-maximising output.

Box 5 Draw - Market Shift: Shift the market demand curve to the right (increase). Label the new equilibrium price (P₂) and quantity (Q₂).

Box 6 Draw - Firm Shift: Show Jason's firm demand shifting up to the new market price P₂. Label his new profit-maximising output.

Box 7 Questions: Write at least two questions you have about why Jason's demand curve is horizontal (i.e., why he is a price taker).

Box 8 Explain: In your own words, explain why Jason's demand curve is perfectly elastic (horizontal) at the market price. Why can't he charge a higher or lower price?

Box 9 Draw - Firm with ATC: Draw Jason's firm diagram including the ATC curve, MC curve, and demand curve. Clearly label the minimum point of the ATC curve.

Box 10 Explain - Productive Efficiency: Based on your diagram, explain the concept of productive efficiency. Under what specific condition is Jason productively efficient? When does he lose productive efficiency?

Box 11 Draw - Market & Firm together: Draw both the market diagram (showing P=MC) and Jason's firm diagram (showing min ATC) side-by-side. Indicate where allocative efficiency and productive efficiency occur on the respective graphs.

Box 12 Explain - Overall Efficiency: Explain the difference between allocative efficiency and productive efficiency. In perfect competition, why is the market always allocatively efficient, while Jason is only productively efficient at one specific price?

Independent Practice

Complete all 12 questions independently. Use Slides 1–5 to check diagrams and test your reasoning.

1 If demand increases while supply remains unchanged, what happens to equilibrium price and equilibrium quantity? Explain why.

2 If supply increases while demand remains unchanged, what happens to equilibrium price and equilibrium quantity? Explain why.

3 Demand and supply both increase. Which equilibrium variable can you predict with certainty? Why might the other variable be uncertain?

4 Jason is one of 1,000 firms selling the same product. Explain why Jason is a price taker.

5 The market price rises from $35. What happens to Jason's horizontal demand curve, and what happens to his profit-maximising output?

6 Why can Jason not charge $45 when the market price is $35? Refer to the assumptions of perfect competition.

7 On your paper, draw Jason's firm. Include P, Q, the horizontal demand curve, MC, and the profit-maximising output. Then state the rule Jason uses to choose output.

8 If the market price falls, explain why Jason's profit-maximising output falls. Use marginal cost in your explanation.

9 What is productive efficiency? State the exact condition using the ATC curve.

10 Jason is producing where P = MC, but he is not producing at minimum ATC. Is he productively efficient? Explain.

11 What is allocative efficiency? Explain why P = MC represents allocative efficiency.

12 A perfectly competitive firm is producing where P = MC but not at minimum ATC. Decide whether it is allocatively efficient, productively efficient, both, or neither. Justify both parts separately.

Work Submitted

Ask Mr Elder before continuing.

Check Your Answers

Compare your answers carefully and correct your work in a different color.

1. An increase in demand raises equilibrium price and equilibrium quantity when supply is unchanged. At the old price there is excess demand, creating upward pressure on price and encouraging a larger quantity supplied.

2. An increase in supply lowers equilibrium price and raises equilibrium quantity when demand is unchanged. More output is available at each price, so the new equilibrium occurs at a lower price and higher quantity.

3. Equilibrium quantity increases for certain. The effect on equilibrium price is uncertain because it depends on the relative size of the increase in demand and the increase in supply.

4. Jason is one of many firms selling an identical product, so he cannot influence the market price. Consumers can buy the same product from other firms, so Jason must accept the market price.

5. Jason's horizontal demand curve shifts upward to the new market price. His profit-maximising output increases because the new P = MC intersection occurs at a larger quantity.

6. If Jason charges above the market price, consumers buy the identical product from another firm. Under perfect competition, many firms and identical products make the individual firm a price taker.

7. The diagram should show P and Q axes, a horizontal demand curve, an upward-sloping MC curve, and the chosen output where P = MC (equivalently MR = MC for the competitive firm).

8. When market price falls, Jason's horizontal demand curve shifts downward. The new P = MC intersection occurs at a lower quantity, so the profit-maximising output falls.

9. Productive efficiency means producing at the lowest possible average cost. It occurs at the minimum point of the ATC curve.

10. No. P = MC can still hold, but productive efficiency requires production at minimum ATC. If output is away from minimum ATC, Jason is not productively efficient.

11. Allocative efficiency occurs where P = MC. Price reflects the value consumers place on the marginal unit, while MC reflects the opportunity cost of resources used to produce it.

12. The firm is allocatively efficient because P = MC. It is not productively efficient because it is not producing at minimum ATC.