Overview
Allocative efficiency is a key concept in economics that ensures resources are used in a way that maximizes societal welfare. It occurs when the price of a good reflects its marginal cost, leading to optimal resource allocation. Understanding this concept is crucial for analyzing market behavior and...
Key Terms
Example: When the price of a good equals its marginal cost.
Example: If producing one more car costs $20,000, the marginal cost is $20,000.
Example: If a consumer is willing to pay $50 for a shirt but buys it for $30, their consumer surplus is $20.
Example: If a producer is willing to sell a product for $20 but sells it for $30, their producer surplus is $10.
Example: When 100 units of a product are supplied and demanded at a price of $10.
Example: If a 10% price increase leads to a 20% drop in demand, the price elasticity is -2.