Notesale: Turn your study into money

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Allocative Efficiency, Comparative advantage and Free markets introduction
There are two main concepts that describe the allocation of resources
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This thinks about producing the right things
using the economy
“ A situation in which production can be reallocated to make at least one person
better off while making no one else worse off
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Technical Efficiency: It is also known as productive efficiency
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It is impossible to
produce relative amount of both goods
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”
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When using old technology or unused resources it leads to technical inefficiency
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Technical
efficiency thinks about is economy producing as much as possible
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For example, Einstein, he was good at physics and let’s assume that he was also good at
typing
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According to the concept
of opportunity cost of capital if Einstein types then the opportunity cost of it would be
missing out the physics work
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He was better at
Physics than typing, he has an advantage at physics in comparison to typing
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All trading decisions are based on comparative
advantage
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As we see
that Alice makes 100 sweaters and 20 suits in a week
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When we make a comparison between Bob and Alice we can see that Alice is
better at making sweaters and suits than Bob
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Through this we can interpret that for every 1 suit Alice makes 5
sweaters
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When doing a total for GDP
we see that total suits are 16 and total sweaters are 62
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Using
the concept of opportunity cost of capital, we can suggest that Alice should do a trade-off
with Bob for suits
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Also, Bob has comparative advantage at making
suits
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Bob
can spend the entire week making suits only
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“Specialisation occurs whenever there are differences in the relative efficiency with which
different producers make different products
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Where as
absolute advantage focuses on everything in terms of others
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Comparative Advantage occurs for two reasons:
1) Innate
2) Result from investing time: i
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Adam Smith was the greatest economist who identified with the idea of specialism in
1976
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”
- The wealth of Nations (1976)

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Adam Smith stresses the point that no one really plans the economy individuals just
happen to help the economy in public interest without any intention
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Descriptive are summary of what is going on rather than a
recommendation
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They do not involve value judgements
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These are purely what
should be, what you should do
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A free market is a market where there is no central plan, everything is based on
individuals’ decisions
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Government
creates the legal and institutional framework which allows free markets to operate
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Private property is an important part of allowing free market to exist
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Therefore, governments involve themselves to
allow the markets to run better
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