Although, when growth is looked at over the long term, the trade-off between efficiency and equality may not be as prominent and equality may appear to be an important ingredient in promoting and sustaining growth. Because of this contrast, it is essential to explore the relationship and impact of the two criterions on the economy. Economic efficiency is a capitalistic process that intends to uses the lowest amount of input to create the greatest amount of outputs. These inputs such as personal time, energy, money and raw materials are scarce resources that would need to be conserved while maintaining an acceptable production level. With such definition, it is commonly agreed that efficiency is a good criteria and can be used to evaluate economies and economic behavior.
By definition, all the curves have an efficient production, but depending on the nature of the market some will be more productive than others. The given equilibrium of an economy given PPF will be the combination of the given outputs that is most profitable. It basically shows the production possibilities in that economy over a given period of time. Factors such as market failure can at times arise, these may be due to imperfect competition or other externalities’ not taken into account. These can lead to wrong grouping of goods being produced hence wrong mixing and allocation of needed resources.
With perfect competition efficiency is achieved because the price is equal to marginal cost. The value of goods produced is indicated by price and thus production generates satisfaction. Opportunity cost of unproduced goods is indicated by marginal cost and therefore resulting lost satisfaction from forgone production. Overall satisfaction cannot be added by decreasing of increasing production because the price (satisfaction obtained) is equal to marginal cost (satisfaction forgone). If there is no equality between price and marginal cost then we can increase satisfaction by changing production.
Economics, in one aspect, is the study of how individuals, societies, and countries manage to deal with the problem of scarcity. Scarcity is a problem within economics because the wants of people are unlimited and the resources available to fulfil those wants are finite (Sloman, 2001). The answer to scarcity is efficiency which Gowland and Paterson (1993) described as the most benefit from a certain amount of scarce resources. Within the economic system, there are several types of economies, each generating a different level of efficiency. It is said that an economic system that has allocative efficiency, productive efficiency, and equity will be effective.
There is no doubt that profitability can be an indicator of market power, but it is important to not base the decision of market power only on this aspect. As explained, the profit can also be a sign of efficiency and high profits can be achieved in competitive markets through legit actions. Profits are an incentive for firms to innovate and expand. If the profit becomes directly associated with market power, the companies may stop to invest in innovation that could lead to lower production costs. Nevertheless, small companies may not be interested anymore to expand and will try to keep their profits at a certain level that would not make them dominant.
One way of achieving this goal is to competitively price goods and services but to maximize profits, or generate revenue greater than the total overall costs at the same time If a supplier is aware of the market supply curve, and has determined at what quantity marginal costs are equal to marginal revenues, a company can determine how much of a particular good or service should be supplied to the current market to earn maximum profit. If the demand for a good or service rises or falls, the supply curve for the supplier must be adjusted and the marginal costs and marginal revenues must be reevaluated to determine what quantity is necessary to maximize profits. The rise or fall of the demand for a good or service in a competitive market affects what the market price of the particular good or service is during any given market condition. If the demand is high and the price is good in a competitive market, a supplier can increase output of a good or service and still maximize profits. If the demand is low, and the market price falls in a competitive market, then suppl... ... middle of paper ... ...in the state of the economy be keeping the other market structures within the boundaries of fair market.
A central function within our economic system is satisfying the needs of the consumers with the use of limited supplies. The purpose of a business is to combine resources such as land, labor, and capital in a way that will make them more valuable. Operating in a political and economic climate that supports individual rights, American business has as its guiding principle the right to private ownership and profit. The amount of goods produced depends upon the number of resources available for use. This idea is commonly known as "Supply and Demand".
Maximizing Profits as the Main Goal The traditional theory (neoclassical) assumes that firm’s primary objective is to maximize profits. That is if the firm is owner controlled. This assumption is based on that firms makes the output and price decisions. Also, that firm takes all necessary actions to earn the greatest profit possible. The managerial theory assumes firms do not necessarily act in order to maximize profits.
Consumer can benefit in cheaper goods, when presented with two products that offer similar benefits, customers vote with their purchases and decide which product will survive. Customers also determine the ultimate price point for a product, which requires producers to set product prices high enough to make a profit, but not so high that customers will hesitate to make a purchase. Except consumer can benefit in cheaper goods, corporate access to larger markets means that firms may experience higher demand for their products, as well as benefit from economies of scale, which leads to a reduction in average production costs. Providing an incentive for countries to specialize and benefit from the application of the principle of comparative advantage. Globalization enables worldwide access to sources of cheap raw materials, and this enables firms to be cost competitive in their own markets and in overseas markets.
A country will have a comparative advantage to the other country if it can gather the labor force and capital and provide the most favorable condition to the production of a product which will obviously lead to the productive efficiency. When an entrepreneur assess the condition in order to start a production the comparisons of inputs to produce and output is not only based to the past or the current prices but also the future prices which is the time it is provided to the market. While comparing the productive alternatives it is more important to consider the comparative advantage in which they specialize alongside profitable allocation of the assets. The results of the trade either profit or loss and the customer preference will help determine in which particular section they have the comparative advantage and will help determine where they need to specialize. Comparatives advantage shows that specialization is possible and useful in situation where the diversity is minimized which means that by using the profit and loss system consumers are the one who decide efficiency of entrepreneurial specialization decisions.