Review of the four market structures
Productive and Allocative Efficiency
<aside> đź’ˇ Productive efficiency for the firm requires the firm to be producing its output at the lowest possible cost
Productive efficiency for the industry ****requires that the marginal cost of production be the same for each firm.
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Any firm that is not being productively efficient is producing at a higher cost than is necessary, and thus will have lower profits than it could have!
Productive efficiency and the production possibility boundary
<aside> đź’ˇ If firms and industries are productively efficient, the economy will be on, rather than inside, the production possibilities boundary.
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Every point on the PPB is productively efficient. But are there any points on the PPB that is “better” in some way than the other? Let’s explore the concept of allocative efficiency
Allocative efficiency
When the combination of goods produced is allocatively efficient, economists say that the economy is Pareto efficient
<aside> đź’ˇ The economy is allocatively efficient when, for each good produced, its marginal cost of production is equal to its marginal value in consumption (as given by the market price)
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Allocative efficiency and the production possibilities boundary
(Question: what if SB ≠WB on the PPB when allocatively efficient)