ECON 3840 Lecture Notes - Lecture 3: Social Welfare Function, Pareto Efficiency, Allocative Efficiency
Document Summary
Efficiency in production: labour, land, human capital: production function depicts the maximum output that can be produced from a given set of inputs using currently available technology. A production process is not technically efficient if answer to eithe(cid:396) of the (cid:395)uestio(cid:374) is (cid:858)yes(cid:859). Cost- effectiveness efficiency: requires producing a good using the least cost method from among all technically efficient methods. For instance, it is cost effective to produce a house using labor intensive techniques is labor in that country is relatively cheap. Ppf- shows the maximum combinations of two goods that society can produce given its available resources and production technologies. All points on the production possibility frontier are technically efficient. However, points inside the curve are technically inefficient. The ppf can be used to show the opportunity cost of production. Allocative efficiency requires that society produce and distribute goods and services in accord with the value that individuals place on those goods and services.