Facoltà di Giurisprudenza

Macerata

Economics2011-2012

Sara Lombardi

Topics:

•Efficiency•Profit

•Market Economy

EFFICIENCY

• Efficiency is the best way of using resources;

• We say that an outcome is efficient when we reach all we can from the scarce resources available

The Production Possibilities Frontier (PPF)is a graph that shows a possible allocation of resources in the economy, imagining that we are producing only two goods (in this case food and computer).

EFFICIENCY IN THE PPF

Any point on the graph are

efficient Point.While any point in the PPF are

unefficient point, and the point up

the PPF are impossible point.

An other way to consider efficiency: • From the side of surplus:

• Total surplus is the total value to buyers of a good (as measured by their willingness to pay) minus the total cost to sellers (of producing this good).

• Consumer surplus = value to buyers – amount paid by buyer• Producer surplus = amount received by sellers – costs to sellers

In the economy, the efficiency is the property of a resource allocation to maximize the total surplus received by all members of society.

•This graph shows the equilibrium in a market economy between supply and demand.

As we can see, in the equilibrium we have an efficient price , at wich we can maximize surplus.

To be noted:

• Efficiency is different from Equity, that is the fairness of the distribution of well-being among the members of society

• Efficiency is also different from Effectiveness, the capability of producing a desired result.

PROFIT

When we speak about profit we have to distinguish between two concepts: normal profit and economic profit.

Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor.

Economic profit is the difference between a firm's total revenue and all costs. (Total Profit= total revenue - total cost)

• The most important goal for a firm that sell a good or a service is to maximize profit, so the optimal quantity of production for the firm is the quantity corresponding to the maximum level of profit.

• Greater profit can be achieved by increasing revenue or by decreasing cost.

• This pursuit of profit creates important incentives to achieve an efficient allocation of resources.

• Profit is occasionally used synonymously with the term rent, or economic rent.

A curve that graphically represents the relation between the economic profit earned by a firm and the quantity of output sold.

The profit curve is commonly used to illustrate the profit-maximizing quantity of output produced by a firm.

PROFIT CURVE

Profit: The vertical difference between these two lines is economic profit. If the total revenue line is above the total cost line in the middle of the diagram, economic profit is positive. If the total revenue line is below the total cost line at the far right and far left, economic profit is negative.

An example

MARKET ECONOMY

•Market economy is a special organization of an economic system where the decisions are taken by households or firms freely. In this type of economy the price of goods are determined only by the interchange of supply and demand, and only the price guides the production and distribution of resources.

Advantages of market economy

•Buyers are free to purchase any commodity which they like and the seller of a good or its producer can also produce whichever product they want

•There’s a unique price determined by the demand and supply in absence of any monopolistic or oligopolistic influences

•The decision of what to produce, for whom to produce and in what quantities is taken by the market forces and not determined by the state

Disadvantages of market economy

• The priorities of firms is only to produce what will earn the biggest profit, not what people really need (for example public health, public education…)

• There would be exploitation of workers, because the harder, faster, and longer people work—just as the less they get paid—the more profit is earned by their employer.

To be noted

• Market economy is different from a planned or command economy, where the price are controlled and set by governments and private property can’t exist.

• Today we can usually have a mixed economy, where the price system is under some state control or at least heavily regulated, but  economic planning is not as extensive as in a planned economy.