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Author Question: Why does an efficient distribution of outputs among households occur in perfectly competitive ... (Read 55 times)

newyorker26

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on: Jun 29, 2018
Why does an efficient distribution of outputs among households occur in perfectly competitive markets?
 
  What will be an ideal response?

Question 2

Distinguish between production efficiency and allocative efficiency. Explain why many production possibilities achieve production efficiency but only one achieves allocative efficiency.
 
  What will be an ideal response?
Foundations of Microeconomics ¦ Bade, Parkin ¦ 8th Edition
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Melissahxx

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Reply #1 on: Jun 29, 2018
Answer to Question 1

Competitive markets ensure that households don't end up with the wrong goods and services. A household will buy a good as its willingness to pay for it is greater than (or equal to) its price. Therefore, as long as households are free to choose how to spend their incomes, they cannot end up with the wrong combinations of goods.

Answer to Question 2

Production efficiency occurs when goods and services are produced at the lowest cost. This definition means that production efficiency occurs at any point on the PPF. Therefore all of the production points on the PPF are production efficient. Allocative efficiency occurs when goods and services are produced at the lowest cost and in the quantities that provide the greatest possible benefit. The allocatively efficient production point is the single point on the PPF that has the greatest possible benefit.


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