• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Discuss whether economic efficiency as described in text books is likely to be able to be achieved in practice

Extracts from this document...


2. Discuss whether economic efficiency as described in text books is likely to be able to be achieved in practice. A. Economic efficiency refers to the allocation of resources to maximize consumer satisfaction at maximum opportunity cost. Efficiency can be classed into two sorts: allocative efficiency and productive efficiency of which the latter is concerned with production taking place at minimum average cost. Productive efficiency theoretically exists absolutely in a perfectly competitive market. This is the market structure where forces of demand and supply determine price so firms are price takers and competitive pressures make these short-run profit maximizing firms produce at lowest average cost of production. However in reality, a market structure of perfect competition does not exist because the model of perfect competition is based on the assumptions that factors of production are perfectly mobile, there is perfect information, there are no barriers to entry and exit and that externalities are non-exist. However in a real situation these aspects are not possible and hence firms cannot be perfectly competitive but will only become as near as possible the like of the model. ...read more.


When the price consumers pay for a product is equal to the marginal cost of producing it, the use of resources is said to be allocatively efficient. This is theoretically an ideal level of output but the theory assumes that marginal costs in all industries are identical. But in practice this is not the case nor is it entirely possible. Different industries and even firms will have different marginal costs due to differences in variable or fixed costs and hence in reality prices cannot be equalized with marginal cost and hence allocative efficiency is not achieved. Also there are factors with ordinal measures that are significant for resource allocation. For example, satisfaction itself. Consumer satisfaction cannot be given absolute cardinal values. Some products such as the differentiated products produced by imperfectly competitive firms can give 'upon consumers' tastes and preferences. Therefore consumers value variety and the price that they pay, which exceeds the marginal cost of producing it, could well reflect this value (even if the value is not a fixed number). ...read more.


For example, the soft-drink brand coca-cola is estimated to be the world's largest producer and the product is believed to be most consumed globally. The success was due to the company's successful advertising and introduction of the product even to the remote areas via vending machines. Consumer's satisfaction worldwide is increased by producing the drink and hence it can be argued that all resources are being allocated to this industry efficiently. But existence of basic needs unfulfilled around the globe and the potential health risks by consuming the soft drink as well as the increased pollution due to disposal of the number of cans and bottles would indicate that resources are inefficiently being allocated to this industry. Hence there exists allocative inefficiency. Scarce resources have alternative uses. Almost every use involves a number of complex costs and benefits to the society. The proper use of the resources is difficult to evaluate due to the existence of conflicts, different interests and ethical issues. Economic efficiency itself as described in text books carry assumptions that may not be entirely possible but this largely depends on how the people concerned view efficiency. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. "If real world markets can be made to resemble more closely the model of ...

    This is shown by the diagram below. Using the example again of farming, if one farmer were to double his wheat output, it would have little effect on price and demand. If all the farmers where to double their output, the price of wheat would collapse. In other words, a firm in perfect competition can therefore expand or contract its output without changing price.

  2. The structure of the airline industry.

    A marketing innovation that airlines initiated after deregulation was the frequent flyer program. Repeat customers earned points toward free tickets or upgrades. This program generated loyalty beyond service and satisfaction with travelers. Recently, the frequent flyer program extends beyond receiving points for flying.

  1. How does Coase account for existence of firms and what factors does he suggest ...

    Coase asked, if the market mechanism for exchange is so perfect, why do we have firms? For instance, why is it that we need to organise the available resources in a specific way if all of them are already available in the market.

  2. Major Economic Organizational Issues

    determine what gets produced, how it gets produced, and who gets the produced goods and services, with the stated aim of ensuring social justice and a more equitable distribution of wealth (see welfare state). If there were shortages, prices would be raised; if there were surpluses, prices would be lowered.[3]

  1. Assess whether a tuck shop is likely to be a successful business if it ...

    concentrated on qualitative research and did not get much information that would help me with my calculations, so I added more quantitive research i.e. I asked what is the normal expenditure per a visit and how often do you visit the tuck shop.

  2. Transaction Cost Theory

    Without opportunism, the transaction would take place within the market, rather than within a hierarchy. But bounded rationality is a precondition for opportunism. So, opportunism and bounded rationality are likely to give rise to internalisation. This, however, is still only part of Williamson's explanation for why and when internal governance will be preferable to market governance.

  1. identify an oligopolistic industry in practice?

    There are legal restrictions on such collusion in most countries, including the UK1. There does not, however, have to be a formal agreement for collusion to take place. For example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership, which is a form of Tacit Collusion.

  2. The Quest for Optimal Asset Allocation Strategies in Integrating Europe.

    Many investment firms are in the process of following this advice, which implies that they will put less time and effort into examining the macroeconomic outlook of a country, instead predominantly focusing on analysing the prospects of an industry and of specific firms within that industry.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work