Economic Efficiency. An allocation of resources is said to be efficient if it is not possible to make one or more persons better off without making at least one other person worse off (applying the Pareto criterion).
An allocation of resources is said to be efficient if it is not possible to make one or more persons better off without making at least one other person worse off (applying the Pareto criterion).
Efficiency in allocation requires that three efficiency conditions are fulfilled:- efficiency in consumption,
- efficiency in production, and
- product-mix efficiency.
I = indifference curve
possible allocation of fixed amounts of X and Y between consumers A and B
in b the marginal rates of utility substitution are equal; MRUSA = MRUSB
C = contract line that links efficient consumption good (X,Y) allocations between A and B consumers
I = isoquant
the possible allocation of fixed amounts of inputs (L and K) to produce X and Y consumption goods
in b the marginal rates of technical substitution are equal; MRTSX = MRTSY
if MRUSA = MRUSB, the slopes of individuals' indifference curves are the same => one I.
MRUS = MRT
Production Possibility Curve/Transformation Curveusing all the available resources
in b the marginal rates of transformation are equal: MRTL = MRTK = MRUSA = MRUSB
Product Possibility/ Production Space
Utility Possibility /Space
X0Y0 and X1 and Y1 are Product Mixes
UU’ is the Grand Utility Frontier
Each point represents MRPT = MRS for each product Mix)
Grand Utility Frontier acts like the Budget constraint and W1-W4 are the desired levels of
Welfare. Tangential point is the Point of Maximum Satisfaction . Point of Welfare Maximization
is Pareto Optimal State
Pareto optimality is necessary but not a sufficient condition for Welfare maximization.
Pt L is on a higher Welfare than Pt N .