Question

BRIEFLY DEFINE OR EXPLAIN THE FOLLOWING COMBINATIONS OF CONCEPTS AND THE RELATIONSHIP BETWEEN THE CONCEPTS:

a. marginal benefit, marginal cost, optimal allocation of resources

b. scarcity, opportunity cost, and rationing device (explain the role of a rationing device and

discuss two different types of rationing devices or allocative mechanisms)

c. decreasing opportunity costs, increasing opportunity costs, constant opportunity costs      

d. economic efficiency, technical efficiency, allocative efficiency

e. consumer surplus, producer surplus

f. demand price, supply price, market price, equilibrium price

Answer 1

a. The marginal benefit is the additional satisfaction derived from the consumption of an additional unit of a commodity. Marginal cost is the addition cost to be incurred while producing an additional unit. The optimal allocation is the equalization of marginal benefit with marginal cost (MB=MC).

b. Scarcity is the limited availability of resources in relation to human wants. Since resources are limited we have to sacrifice the production of some good while producing another good. The amount of another good so sacrificed in the production of one goods is its opportunity cost. The basic reason of opportunity cost is the scarcity of resources in relation to multiplicity of wants. Rationing is a government policy which imposes on the allocation of scarce resources or consumer goods. Rationing help the utilization of scarce resource in a market mechanism. When the resources are scarce the demand exceeds supply. In such a scenario the use of rationing prevent the price hike and helps to control the over use of the scarce resources.

c. Opportunity cost is the next best alternative sacrifice for the production of one commodity. For example if the economy is producing two goods X and Y. Given the resources remaining constant, the opportunity cost of commodity Y is the amount of X sacrificed for the production of Y. The increasing opportunity cost implies that the opportunity cost of producing good increases as more and more of that goods is produced. In such case the opportunity cost curve will be concave to the origin. The decreasing opportunity cost is a situation where the opportunity cost of producing a commodity decreases as more and more units of that commodity is produced. In such case the opportunity cost curve will be convex to the origin. The constant opportunity cost means that the opportunity cost of producing and addition unit remain constant as more units of that goods is produced. Here the opportunity cost curve will be a straight line.

d. Economic efficiency refers to s situation when there is optimal allocation of available resources. Under the optimal allocation, it is impossible to make one person better off without making someone worse off. Economic efficiency includes productive efficiency, Allocative efficiency, dynamic efficiency and X efficiency. Technical efficiency is the attainment of maximum output from a given technology. It is the use of least cost technology which produces maximum output. Allocative efficiency refers to the distribution of goods and services in the most efficient manner. The distributive efficiency is achieved when goods and services are produce according to the consumers preferences and distributed according to a system where marginal cost is equal to price (MC=MB). Economic efficiency includes technical efficiency and Allocative efficiency.

e. Consumer surplus is the extra satisfaction that a consumer gain while purchasing a commodity. It is the difference between the price that a consumer is willing to pay for a commodity and the price he actually paid for it. The producer’s surplus is the extra satisfaction obtained by a producer while supplying a product. It is the difference between the prices at which he is willing to supply and the price that he actually received for the product. The increase in consumer’s surplus reduces the producers surplus and increase in producers surplus reduce consumer’s surplus and vice versa.

f. Demand price is the price that a consumer is willing to pay for a given quantity of the commodity. Supply price is the minimum price of a given quantity of a commodity at which a seller is willing to supply. The relationship between the demand price and supply price is that as the demand price increase the sellers are willing to supply more and viceversa. The market price is the price determined by the forces of demand and supply of a product. It is the price at which the buyers and sellers agree to sell a given quantity of a commodity. Equilibrium price is the price at which the demand for a commodity is equal to its supply.