EconomicsNotes

    The main idea associated with Vilfredo Pareto is that, where price is equal to marginal cost, no one can be better off without someone else being worse off. This means that the Pareto point shows allocative efficiency, or an economy in which everyone has everything at its ‘true’ value. This is distinct from productive efficiency, in which everything is produced at the marginal efficient scale, or lowest long-run average cost.   Both forms of efficiency are predicated on the idea that the equilibrium price in a market reflects both social marginal costs and benefits, and private marginal costs and benefits. An additional assumption is that a situation in which firms essentially produce in perfect competition (the only market structure in which allocative and productive efficiency arise) is the best use of resources. A moment’s reflection, however, illustrates that this is not true. Negative and positive externalities of production and consumption exist, for insta...

  Demand curves are made up of points at which the quantity consumed of a good or service by a consumer is balanced against its price. This usually reflects a situation in which consumers will pay less given a greater quantity of a good on sale, and more when there is a lower quantity around. Explaining how these points arise is therefore different from explaining the causes of demand—which are, broadly, income, fashion taste and preference, and the price and availability of substitute and complementary products. It is also different from explaining the slope of the demand curve, which is a matter of elasticity (and which can be affected by non-price hedonic factors such as effective advertising, or addiction.) There are two convincing theories of why the points which make up a demand curve arise. One is based on the theory of marginal utility. The second is based on the idea of consumer indifference. Marginal utility theory holds that a consumer will look to the usefulness der...