IBonomicsAllocative EfficiencySL
MicroeconomicsA diagram showing that allocative efficiency occurs where marginal benefit equals marginal cost, meaning resources are allocated to maximize welfare.
Curves and elements
- Demand = MB
- Shows the marginal benefit consumers receive from each additional unit consumed.
- Supply = MC
- Shows the marginal cost of producing each additional unit.
- Qe
- The efficient quantity: the output level where marginal benefit equals marginal cost.
- Allocative efficiency
- Occurs where MB equals MC, meaning resources are allocated in a way that maximizes total welfare.
- Allocative inefficiency
- Occurs when MB does not equal MC, meaning resources are not allocated to their most valued use.
Key explanations
- 1
The demand curve represents marginal benefit, showing the benefit consumers receive from each additional unit.
- 2
The supply curve represents marginal cost, showing the cost to producers of supplying each additional unit.
- 3
Allocative efficiency occurs at Qe, where marginal benefit equals marginal cost.
- 4
Allocative inefficiency occurs when marginal benefit does not equal marginal cost, meaning society either overproduces or underproduces the good.
Example exam question
Explain why allocative efficiency occurs where marginal benefit equals marginal cost, using a demand and supply diagram.
Show example answer
Allocative efficiency occurs where MB equals MC because the value consumers place on the last unit is equal to the cost of producing it, so society’s welfare is maximized.
