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LAND: One of four basic categories of resources, or factors of production (the other three are labor, capital, and entrepreneurship). This category includes the natural resources used to produce goods and services, including the land itself; the minerals and nutrients in the ground; the water, wildlife, and vegetation on the surface; and the air above.

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EFFICIENCY:

Generating the most possible satisfaction from a given amount of resources. Efficiency means that this satisfaction of wants and needs cannot be increased by producing more of one good and less of another. This is one of the five economic goals and one of two microeconomic goals. The other goals are full employment, stability, economic growth, and equity.
Efficiency is obtained when society is able to get the greatest amount of satisfaction from available resources. With efficiency, society cannot change the way resources are used in any way that would increase the total amount of satisfaction obtained by society. The pervasive scarcity problem is best addressed when limited resources are used to satisfy as many wants and needs as possible. Efficiency is indicated by equality between demand price and supply price for a given market.

Competitive Markets

The best way to understand this microeconomic goal of efficiency is through the market model.
  • The buying side of the market, market demand, reflects the willingness and ability to make a purchase. In particular, the demand price indicates the value, in terms of satisfaction, that society receives when a good is produced.

  • The selling side of the market, market supply, reflects the opportunity cost of production. In particular, the supply price indicates the value, in terms of satisfaction, that society foregoes from other goods not produced.
Efficiency is achieved when the demand price is equal to the supply price. The value of the good produced is equal to the value of goods not produced. Efficiency is achieved by this equality because society cannot increase satisfaction by producing more of one good and less of another.

To illustrate, consider the Shady Valley market for caramel nougat clusters--a tasty candy treat. The going equilibrium market price, the one which equates demand price and supply price, is fifty cents per cluster.

Buyers are willing to pay a demand price of fifty cents because each caramel nougat cluster generates fifty cents worth of satisfaction. Alternatively, sellers are willing to accept a supply price of fifty cents because each caramel nougat cluster incurs an opportunity cost of fifty cents when produced. More specifically, the resources used to produce each caramel nougat cluster could have been used to produce alternative goods that would have generated fifty cents worth of satisfaction.

Because the demand price and supply price are equal, this market is efficient. But what happens if the demand price and supply price are not equal?

  • Demand Price Exceeds Supply Price: In this case the value of the caramel nougat clusters produced is greater than the value of other goods not produced. The people of Shady Valley place a higher value on caramel nougat clusters than on other goods that could be produced with the resources. Total satisfaction can be increased by producing more caramel nougat clusters.

  • Supply Price Exceeds Demand Price: In this case the value of the caramel nougat clusters produced is less than the value of other goods not produced. The people of Shady Valley place a lower value on caramel nougat clusters than on other goods that could be produced with the resources. Total satisfaction can be increased by producing fewer caramel nougat clusters.
In both cases where the demand price and supply price are not equal, satisfaction can be increased by changing production. Satisfaction cannot be increased if demand price and supply price are equal.

Market Failures

In some cases, efficiency is not achieved even though the demand price and supply price are equal at the intersection of the market demand and market supply curves (that is, market equilibrium). Efficiency is prevented due to the existence of market failures, so-called because the market "fails" to achieve efficiency. The four most noted market failures are (1) public goods, (2) market control, (3) externalities, and (4) imperfect information.

In particular, if the demand price does not reflect the total satisfaction received from the good produced and/or the supply price does not reflect the total satisfaction foregone from other goods not produced, then market equilibrium does not mean efficiency.

This is best illustrated by the market failure of externalities. Once again, consider the Shady Valley market for caramel nougat clusters. Suppose, for example, that the production of caramel nougat clusters results in the emission of pollution into the air. This pollution causes acute respiratory problems for thousands of Shady Valley residents, which imposes an external cost on others, on people who have no involvement in the caramel nougat cluster market.

This external cost means that the market supply price does not reflect the complete opportunity cost of production. As such, equality between demand price and supply price is not efficient. The value of foregone production is greater than the value of the caramel nougat clusters produced.

The Priority and Politics of Efficiency

The microeconomic goal of efficiency is, for the most part, universally acknowledged as a beneficial pursuit. There is, however, some degree of debate about the importance of pursuing efficiency over other economic goals.

Economists, generally place efficiency at the top of the list of goals. Equity, full employment, stability, and economic growth are certainly worth pursuing, but an efficient allocation of resources means that the economy is doing the best possible job of addressing the scarcity problem.

Many other people who do not spend their lives concerned with the study of scarcity, as well as a few economists who do, question the priority position typically given to efficiency. For example, getting the most possible satisfaction from available resources is good, but not so good if resources, income, and wealth are unequally distributed and only a handful of people benefit from the efficiency.

<= EFFECTIVE DEMANDEFFICIENT =>


Recommended Citation:

EFFICIENCY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: October 22, 2017].


Check Out These Related Terms...

     | economic goals | microeconomic goals | equity | macroeconomic goals | full employment | stability | economic growth |


Or For A Little Background...

     | scarcity | three questions of allocation | satisfaction | opportunity cost | microeconomics | contributive standard | economic thinking | conservative |


And For Further Study...

     | seven economic rules | economic system | consumer sovereignty | political views | ownership and control | incentive | government functions | technical efficiency | economic efficiency | fourth rule of competition | resource allocation | market efficiency | minimum efficient scale | competitive market | opportunity cost |


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