Principles of Microeconomics / Unit 7 MIC 0636 worked example, 60 to 90 seconds
Testing Efficiency at a Quantity
The idea
Given a market's demand curve, a firm's marginal cost and average total cost, and a proposed quantity, run two tests. Allocative: compare the price buyers pay for the last unit with its marginal cost. If price exceeds marginal cost, too little is produced; if marginal cost exceeds price, too much; equality passes. Productive: compare average total cost at the quantity with its minimum. Equality passes; anything higher fails. A competitive long-run equilibrium passes both; most other outcomes fail at least one.
In practice
Worked example: in the strawberry market buyers pay twenty-five dollars for the last flat and the farm's marginal cost at seven flats is between twenty-four and twenty-eight, bracketing the price: allocatively efficient as nearly as whole flats allow, and average total cost at seven is at its minimum, so productively efficient too. Now a rule holds every farm to five flats. Buyers would pay thirty for the fifth-thousand flat while marginal cost is sixteen: too little produced, and average total cost at five is twenty-six, above its minimum. Both tests fail.
Where people slip
The tests are separate; a firm can pass one and fail the other, as a monopoly at minimum average cost would. And efficiency is a positive judgment about waste, not a verdict on whether the outcome is fair, which the next video takes up.
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