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Table of Contents

  1. Topic pack - Microeconomics - introduction
  2. 1.1 Competitive Markets: Demand and Supply
  3. 1.1 Competitive Markets: Demand and Supply - notes
    1. The nature of markets
    2. Types of markets
    3. Market structure
    4. Spectrum of competition
    5. Demand
    6. The law of demand
    7. Individual and market demand
    8. Non-price determinants of demand
    9. Movements along the demand curve
    10. Shifts in the demand curve
    11. Example - shifts and movements along a demand curve
    12. Exceptions to the normal law of demand
    13. Linear demand functions
    14. Linear demand functions - example
    15. The law of supply
    16. Non-price determinants of supply
    17. Movements along the supply curve
    18. Shifts in the supply curve
    19. Shifts and moves of supply curve
    20. The real supply curve?
    21. Linear supply functions
    22. Linear supply functions - example
    23. Market equilibrium
    24. Market equilibrium - notes
    25. Excess demand and excess supply
    26. Example 1 - the market for DVD players
    27. Example 2 - the market for fish
    28. Applications of demand and supply
    29. Calculating market equilibrium
    30. Calculating equilibrium - example
    31. Scarcity and choice
    32. Choice and opportunity cost
    33. Price signalling
    34. Market efficiency - consumer surplus
    35. Market efficiency - producer surplus
    36. Allocative efficiency
  4. 1.1 Competitive markets - questions
  5. 1.1 Competitive markets - simulations and activities
  6. 1.2 Elasticities
  7. 1.2 Elasticities - notes
  8. Section 1.2 Elasticities - questions
  9. Section 1.2 Elasticities - simulations and activities
  10. 1.3 Government intervention
  11. 1.3 Government Intervention - notes
  12. 1.3 Government intervention - questions
  13. 1.3 Government intervention - simulations and activities
  14. 1.4 Market failure
  15. 1.4 Market failure - notes
  16. Section 1.4 Market failure - questions
  17. Section 1.4 Market failure - simulations and activities
  18. 1.5 Theory of the firm
  19. 1.5 Theory of the firm - notes (HL only)
  20. Section 1.5 Theory of the firm - questions
  21. Section 1.5 Theory of the firm - simulations and activities
  22. Print View

Allocative efficiency

Allocative efficiency is an important concept in economics and one we shall return to throughout this module. Allocative efficiency is essentially a situation where consumers are getting the maximum possible satisfaction from the current combination of goods and services being produced and sold. In other words by changing their pattern of consumption and buying different quantities of goods and services, consumers could not increase the satisfaction they are getting.

If we apply this concept at the level of a market, then we can see that society will get the maximum possible benefit when a market is in equilibrium. If we look at figure 1 below, then we can see that at a quantity of Q* (the equilibrium quantity), both consumer and producer surplus are maximised. If the economy was to produce a quantity below Q*, then more consumer and more producer surplus could be gained by a greater quantity being produced and sold of this good.


Figure 1 Consumer and producer surplus

Allocative efficiency requires two different types of efficiency:

  1. Efficiency in consumption - this is where consumers allocate their incomes in such a way that they get the maximum possible satisfaction from their limited incomes. We assume that this is what all rational consumers are trying to achieve.
  2. Efficiency in specialisation and exchange - this type of efficiency requires efficient markets where firms specialise in producing and selling and consumers specialise in working so that they can buy goods and services. In this way the markets are as efficient as is possible.

The combination of both these types of efficiency results in allocative efficiency. Allocative efficiency will be increased as long as doing more of something results in a greater marginal benefit to society than marginal cost. As long as this process continues, allocative efficiency will increase. The optimum level of allocative efficiency will be where this process reaches its logical conclusion. In other words where marginal benefit = marginal cost.