Efficiency

MB 5006 BUSINESS ECONOMICS

Ana Noveria
Single-price Monopoly’s Output and Price Decision
Single-price Monopoly’s and Competition Compared
Single-price Monopoly’s and Competition Compared
Single-price Monopoly’s and Competition Compared
Efficiency in Perfect Competition
Single-price Monopoly’s and Competition Compared

The figure shows the

efficiency of a monopoly

Because price exceeds

marginal social cost, marginal
social benefit exceed
marginal social cost, and a
deadweight loss arise
Single-price Monopoly’s and Competition Compared
Single-price Monopoly’s and Competition Compared
Resource allocation methods
Scarce resources might be allocated by using any or some combination of the following
methods:

• Market price
• Command
• Majority rule
• Contest
• First-come, first-served
• Sharing equally
• Lottery
• Personal characteristics
• Force
Demand and Marginal Benefit

• The relationship between the price of a good and the quantity demanded by one person
is called individual demand.
• Market demand curve is the sum of individual demand curves

• Demand, Willingness to Pay and Value

• Value is what we get, price is what we pay
• The value of one more unit of a good or service is its marginal benefit (MB)
• We measure value as the maximum price a person is willing to pay (WTP).
• WTP for a good or service determines demand.

• A demand curve is a marginal benefit curve.

Demand and Marginal Benefit
Demand and Marginal Benefit
Consumer Surplus

Assume the price = £1.00

•Consumer surplus
Area under the demand
curve and above the
price line.
Demand and Marginal Benefit

• Assume the price = £1.50

• Consumer surplus
Area under the demand curve and above the
price line.
Supply and Marginal Cost

Supply, Cost and Minimum Supply-Price

Cost is what the producer gives up, price is what the producer receives.

The cost of one more unit of a good or service is its marginal cost.

Marginal cost is the minimum price that a firm is willing to accept.

Minimum supply-price determines supply.

A supply curve is a marginal cost curve.
Supply and Marginal Cost

Individual Supply and Market Supply

• The relationship between the price of a good and the quantity supplied by one
producer is called individual supply.
• Market supply is the sum of individual firms’ supply curves.

• Supply curve = MC curve.

• Supply curve shows:
•At any price, how much will the firm produce.
•At any quantity, what is each firm’s MC
Supply and Marginal Cost

At any price, how much will the firm produce:

At £15; QS= 100
At any quantity, what is the firm’s MC.
At QS= 100; MC = £15
Producer Surplus
Producer receives gain in excess of marginal cost

• Assume the price = £15

• Producer Surplus
Area above the supply curve and below the price line.
Producer Surplus

• Assume the price = £10

• Producer Surplus
•Area above the supply curve and below the price line.
Is the competitive market efficient?

Efficiency of Competitive Equilibrium

Efficient allocation of resources where:

QD= QS
MSB = MSC

In equilibrium, total surplus is maximized.

Is the competitive market efficient?

Market Failure
• Markets do not always achieve an efficient outcome.
• We call a situation in which a market delivers an inefficient outcome one of
market failure.

Market failure can occur due to:

• Underproduction
• Overproduction
Underproduction
Overproduction
Market failures
Is the competitive market efficient?
Sources of market failures
1. Externalities
2. Public goods (e.g. National defence, roads) and common resources
3. Imperfect information, or information asymmetry
4. Taxes and subsidies
5. Price and quantity regulations
6. Monopoly
7. High transaction costs
Imperfect information
Adverse selection
• Recruiting an employee, people in job interviews
• Buying insurance
• Telemarketing investment advice
• Selling used cars

Moral hazard
• Government’s promise to bails out loss-making banks
Public goods and common resources
When resources are commonly owned, they will be overused. The
tragedy of the commons strikes when no one has the right to exclude
• Overfishing
• Over-grazing
• Commonly shared secretary
• Fixed-fee internet pricing plan