ACC-101: MANAGERIAL ECNOMICS
LESSON 6:
1ST SEMESTER | A.Y. 202Y – 202Y
LECTURER: SIR/MS.
General Equilibrium and the Efficiency of Perfect The three basic questions in a competitive economy
Competition are:
(1) What will be produced? What determines the
Firms and Household Decisions final mix of output?
(2) How will it be produced? How do capital, labor,
and land get divided up among firms?
(3) Who will get what is produced? What is the
distribution of output among consuming
households?
The 2 different market structures will answer these
economic questions in different ways
Perfect Competition and Imperfect Competition has a
different approach in answering What, How, and
Whom
As we will see, in a perfectly competitive economic
system:
(1) resources are allocated among firms efficiently,
(2) final products are distributed among households
efficiently, and
Input and output markets cannot be considered
(3) the system produces the things that people want.
separately or as if they operated independently.
Resources are being efficiently allocated—nabibili
ng mga household yung mga gusto nila
Partial Equilibrium Analysis
Partial equilibrium analysis is the process of Pareto Efficiency
examining the equilibrium conditions in individual
Pareto efficiency, or Pareto optimality, is a
markets, and for households and firms, separately.
condition in which no change is possible that will
We look at the goods in money and labor market
make some members of society better off without
separately
making some other members of society worse off.
This very precise concept of efficiency is known as
allocative efficiency.
General Equilibrium It was first introduced by Wilfredo Pareto
General equilibrium is the condition that exists
when all markets in an economy are in simultaneous
equilibrium. Example:
o An economy contains two people and two goods,
apples and bananas. Person 1 likes apples and
Efficiency dislikes bananas (the more bananas she has, the
In judging the performance of an economic system, worse off she is), and person 2 likes bananas and
two criteria used are efficiency and equity (fairness). dislikes apples. There are 100 apples and 100
Efficiency is the condition in which the economy is bananas available.
producing what people want at the least possible
cost. The only allocation that is Pareto efficient is that in
You are an efficient economy if you are able to which person 1 has all the applies and person 2 has
satisfy all the needs of the citizens at the least all the bananas. For any other allocation, one of the
possible cost. persons has some units of the good she does not like,
and would be better off if the other person had those
The Efficiency of Perfect Competition units.
o Trisha likes APPLE | Dona like BANANA o Imperfect competition is an industry in which single
5A / 5B 5A / 5B firms have some control over price and competition.
o Imperfectly competitive industries give rise to an
Not Pareto Optimality—because they are not satisfied inefficient allocation of resources.
with what have given to them o Monopoly is an industry composed of only one firm
10 A | 10 B that produces a product for which there are no close
substitutes and in which significant barriers exist to
Pareto Optimality—you no longer need to change prevent new firms from entering the industry.
anything because both are better off while other members o In all imperfectly competitive industries, output is
of society are not being made worse off lower—the product is underproduced—and price is
higher than it would be under perfect competition.
The equilibrium condition P = MC does not hold,
When people get what they want, without making and the system does not produce the most
other people worse off, you have a pareto optimal efficient product mix.
condition—Allocative Efficiency, which means all
your resources and goods are being allocated
efficiently PUBLIC GOODS
o Public goods, or social goods are goods and
services that bestow collective benefits on members
Efficient Allocation of Resources
of society.
Perfectly competitive firms have incentives to use Generally, no one can be excluded from enjoying
the best available technology. their benefits. The classic example is national
With a full knowledge of existing technologies, firms defense.
will choose the technology that produces the output o Produced by the government for public consumption
they want at the least cost. o It refers to any good or service that is made
available to all members of society
o It is paid for collectively through taxes—ang
ginagastos ng government to produce public good
Efficient Distribution of Outputs Among Households
is taxes
Within the constraints imposed by income and o There is a “free-rider problem”—wherein anyone
wealth, households are free to choose among all the can use public good, regardless whether you pay
goods and services available in output markets. taxes or not—nakikisakay lang even without the
Utility value is revealed in market behavior. payment of taxes
As long as everyone shops freely in the same o Example: Infrastructure, law enforcement,
markets, no redistribution of final outputs among roads/highways, public schools, government
people will make them better off. buildings
In perfect competition, there is pareto optimality Characteristics of Public Goods:
However, that is the opposite when it comes to a) Non-rival—if someone is using the good,
imperfect competitions others can still use the good
b) Non-excludable—if someone is using a
public good, other people cannot be excluded
The Sources of Market Failure from using a public as well
Market failure occurs when resources are o Private goods are products produced by firms for
misallocated or allocated inefficiently. The result is sale to individual households.
waste or lost value. Evidence of market failure is o Produced by private companies
revealed by the existence of: o Example: Private cars, goods we buy; clothes, food,
(1) Imperfect markets shoes, public transportation, etc.
(2) Public goods Characteristics of Private Good:
(3) Externalities a) Rivalrous
(4) Imperfect information b) Excludable
Private provision of public goods fails. A
completely laissez-faire market will not produce
IMPERFECT MARKETS everything that all members of a society might
want. Citizens must band together to ensure that
desired public goods are produced, and this is
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generally accomplished through government — Passive smoking: Smoking results in negative
spending financed by taxes. effects not only on the health of a smoker but on
Private individuals/firms will not produce public the health of other people.
goods because it will not benefit their company — Traffic congestion: The more people that use cars
There is no incentive for private companies to on roads, the heavier the traffic congestion
produce public goods becomes.
Market failure happens in terms of the provision
Positive Externalities
of public good because:
(1) Free-Rider Problem – everyone can use — Infrastructure development: Building a subway
public good, free of charge despite not paying station in a remote neighborhood may benefit real
taxes estate agents who transact properties in the area.
(2) Public goods cannot be provided by private Real estate prices would likely increase due to
sectors/ firms, as there is no provision for better accessibility, and the agents would be able
them to earn higher commissions.
— R&D activities: A company that discovers a new
technology as a result of research and
EXTERNALITIES development (R&D) activities creates benefits
that help society as a whole.
o An externality is a cost or benefit resulting from — Individual education: The increased levels of an
some activity or transaction that is imposed or individual’s education can also raise economic
bestowed on parties outside the activity or productivity and reduce unemployment levels.
transaction. — Vaccination: Benefits not only the person
Cost (Negative) vaccinated but other people in the community
Benefit (Positive) because the probability of being infected
An externality can be both positive and negative decreases.
Negative Externality – when there is cost or
negative effect on another party outside the
transaction IMPERFECT INFORMATION
Positive Externality – when there is benefit or o Imperfect information is the absence of full
positive effect on another party outside the knowledge concerning product characteristics,
transaction available prices, and so forth.
The market does not always force consideration The absence of full information can lead to
of all the costs and benefits of decisions. Yet for transactions that are ultimately disadvantageous.
an economy to achieve an efficient allocation of
resources, all costs and benefits must be
weighed.
It is a source of market failure—for example, the
factory that emits pollution in the air or water is
not being made to pay for the bad effect on the
environment—hindi siya pinagbabayad ng
gobyerno or community na malapit sa factory
Example:
Negative Externality
— Air pollution: A factory burns fossil fuels to
produce goods. The people living in the nearby
area and the workers of the factory suffer from the
deteriorating air quality.
— Water pollution: a tanker spills oil, destroying the
wildlife in the sea and affecting the people living
in coastal areas.
— Noise pollution: People living near a large airport
suffer from high noise levels.
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