Resource efficiency
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Intros
Lessons
- Resource Efficiency Overview:
- PPF and Marginal Cost
- Allocative Efficiency
- Defining Marginal Cost
- Creating the Marginal Cost Curve
- Marginal Benefit
- Benefit received from one additional unit
- Willingness to Pay
- Cannot be derived from PPF
- Finding the Allocative Efficiency
- MB = MC
- An example of Finding Allocative Efficiency
Examples
Lessons
- Finding the Marginal Cost Curve
Using the table given, find the PPF and graph the marginal cost curve of food.
Food
Drinks
6
0
4
4
2
7
0
9
- Using the following information given, graph the PPF and graph the marginal cost curve of bananas
Pops (per day)
Bananas (per day)
18
0
15
2
11
4
6
6
0
8
- Graphing the Marginal Benefit Curve
Using the following information given, graph the marginal benefit curve.
Chocolate
Willingness to Pay
0
12
1
10
2
8
3
6
4
4
- Finding the Allocative Efficiency
Find the allocative efficiency of fruits when given the following information
Candy
Fruits
0
4
2
3
5
2
8
1
12
0
Fruits
Willingness to Pay
0
12
1
10
2
8
3
6
4
4
Topic Notes
In this section, we will learn how to pick the best choice in the PPF.
PPF and Marginal Cost
Recall that a point is production efficient when it is on the PPF. However, which point on the PPF is the best choice?
We need to see which point gives the greatest benefit.
Allocative efficiency is gained when the goods and services are produced at the lowest cost and gives the greatest benefit. In other words, a choice at allocative efficiency is the best option.
Marginal Cost: the opportunity cost of producing one additional unit. This can be calculated by finding the slope of two near points along the PPF.
Recall the slope formula to be:
By calculating all slopes between two points along PPF, we can use those slopes to create a marginal cost curve.
Marginal Benefit: is the benefit received from consuming one more unit of it. Benefits are subjective and depends on people’s preferences.
Note: Marginal Benefits cannot be derived from the PPF and is usually given in the question.
Finding the Allocative Efficiency
When MB > MC, then the benefit of an additional unit is higher than the cost of an additional unit. So, you would want the additional unit because the marginal net benefit is positive.
When MB < MC, then the benefit of an additional unit is less than the cost of an additional unit. So, you would not want the additional unit because the marginal net benefit is negative.
Therefore, the allocative efficiency exists when MB = MC. This is because you don’t gain anything from the additional unit, so there is no point.