Question

Efficiency and how to determine an efficient allocation using demand and supply curves; differences between static and intertemporal efficiency.

Answer 1

Ans:

There are many different meanings to efficiency that one can give. But, in true sense, effciency means maximizing the output with optimal use of resources. It aims at avoiding resource wastage. Using minimum resources effectively to achieve the desired outputs.

In order to determine an efficient allocation using demand and supply curves, one needs to keeps in check that whatever is being produced is all getting consumed and the market clears. It means that there is neither excess demand (lesser supply) or excess supply (lesser demand). Therefore the market clears out at the point of intersection of demand and supply curves, giving us the equilibrium Price and Quantity which ensures complete utilisation of produced output.

The difference between static and intertemporal is that, if you use some of the resource today you'll have less tomorrow.

Elaborating more, static efficiency marks the affairs that are strictly undertaken keeping in mind a single time period or say present one.

Ex: A timber-harvesting firm cuts down a number of trees this year and ships them to market. This decision is efficient in the static sense if they are undertaken in light of their consequences for this year only

Whereas, for intertemporal or dynamic efficiency,it takes into account all the consequences flowing from it, those occurring this year and those in the future.

Ex: In the above example, if the timber harvesting firm cuts down larger proportion of tree this year means it will have lesser amount in near future and there might be possibility that cutting down and replanting trees this year means there will be no trees to cut and parcel until such time as the new trees mature. There are clearly future consequences flowing from today's decisions.