18 Questions
What is the condition for efficiency in production?
The economy must be employing all of its factors of production in an efficient combination
What is the principle behind Pareto efficiency?
It is impossible for one individual to gain without another individual incurring a loss
What is the requirement for efficiency in exchange?
It is impossible to redistribute goods and services to benefit someone without harming someone else
What does the concept of Pareto optimality imply?
It is impossible to make someone better off without making someone else worse off
What is the graphical representation of the different combinations of two goods that can be produced given the available resources?
Production Possibility Frontier
What is the term for the efficient combination of goods and services produced?
Efficient mix
What is the condition for an efficient output mix in terms of marginal rates?
MRSfc = MRTfc
What is the characteristic of all points on the production possibility frontier?
They are all technically efficient
What is the shape of the production possibility frontier?
Concave
What is the purpose of the welfare criteria?
To judge whether a change in production and distribution increases social welfare
What is represented by points on the contract curve?
Different distributions of a given product mix
What is the condition for a Pareto optimal allocation of goods?
It is impossible to make one individual better off without making another worse off
What is the term for an optimal outcome in Economics, where it is not possible to make one person better off without making another worse off?
Pareto Optimum
Which of the following statements is true about a Pareto Improvement?
It makes one person better off without making another worse off.
What happens when an economy reaches a Pareto Optimal outcome?
No further improvement can be made.
In the context of resource distribution, what is the significance of point (10,10) in the example provided?
It is a Pareto Optimal outcome.
What is the consequence of continuing to redistribute resources beyond point (10,10)?
It makes one person better off and another person worse off.
What is the term for a situation where it is still possible to make one person better off without making someone else worse off?
Pareto Inefficient
Study Notes
Efficient Output Mix
- An efficient output mix occurs when the conditions for production efficiency and consumption efficiency are satisfied, and the economy is producing at a point on its production possibility frontier.
- All points on the production possibility frontier are efficient from a production point of view, but not all are equally efficient from a consumption point of view.
- A movement along the PPF that increases food production at the expense of cloth production may make both consumers better off if both prefer food to cloth.
Conditions for Efficient Output Mix
- MRSfc (marginal rate of substitution) equals MRTfc (marginal rate of transformation) at the point of efficient output mix.
- In a perfect competition, MC = price, MRSfc = PF/PC = MCf/MCc = MRTfc.
Welfare Criteria
- Pareto optimality or Pareto efficiency is the condition where it is impossible for one individual to gain without another individual incurring a loss.
- Any allocation of resources is said to be Pareto efficient if it is impossible to make one individual better off without making another worse off.
Conditions of Pareto Efficiency
- Efficiency in production: the economy must employ all its factors of production in an efficient combination, on its production possibility frontier.
- Efficiency in exchange: it must be impossible to redistribute a given stock of goods and services in such a way that benefits someone without harming someone else.
- Efficient mix: it must be impossible to change the actual combination of goods and services produced in such a way that will benefit someone without harming someone else.
Pareto Optimum
- An outcome is efficient or Pareto optimum if it is not possible to make one person better off without making another worse off by moving away from it.
- At the point of Pareto optimum, no further improvement can be made.
Pareto Inefficiency
- An outcome is inefficient if it is still possible to make one person better off without making someone else worse.
- A change that makes one individual better off while not making another worse off is called a Pareto Improvement.
Learn about the concept of Pareto optimality, also known as Pareto efficiency, which refers to the allocation of goods and inputs that makes it impossible to improve one person's situation without making someone else worse off. Understand the definition and importance of Pareto efficiency in economics.
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