Unit 5 — Economic Efficiency

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Purpose:

To help viewers understand the forces that affect prices, the way prices act as signals to consumers and producers, the cost of interfering with free-market prices, and the circumstances that justify interference with the free market.

Objectives:

  1. People are motivated to buy and sell goods and labor services by their desire to improve their well-being.

    1. Consumers purchase products and services to maximize their well-being.
    2. Producers supply these products and services in a manner that maximizes their profits.
  2. Prices are the mechanism that provides information and incentives to buyers and sellers.

    1. Prices tell producers how much they can produce at what profit.
    2. Prices indicate to consumers how much and what they can buy with their income.
    3. The market balance occurs at a price where the separately formed plans of buyers and sellers mesh so that the quantity demanded (at a particular price) and the quantity supplied (at that price) are the same.
    4. This equilibrium point encourages the efficient allocation of resources.
  3. Interference with the natural market forces through the imposition of price controls, rationing, quotas, etc., can lead to an inefficient allocation of resources.
  4. There are circumstances in which market intervention may be justifiable:

    1. Markets may exhibit unstable price behavior.
    2. Market forces may hurt the economically disadvantaged.
    3. Markets may not respond quickly enough during national emergencies.

Audio and Transcripts

Meet the Series Experts

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John Kenneth Galbraith

John Kenneth Galbraith

Economist known as the leading proponent of 20th-century political liberalism, and a prolific author who produced four dozen books and more than a thousand articles, including the popular trilogy American Capitalism, The Affluent Society, and The New Industrial State.

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Herbert Stein

Herbert Stein

Senior fellow at the American Enterprise Institute and Chairman of the Council of Economic Advisers under presidents Richard Nixon and Gerald Ford.

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ECONOMICS IQ?

  1. If a firm has no fixed costs, we can safely conclude that...

    average variable cost equals average total cost.

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  2. A market characterized by many firms, low barriers to entry, standardized products, and no power over market price is characteristic of...

    perfect competition.

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  3. A perfectly competitive firm will generally do which of the following?

    Continue producing as long as it can cover variable costs.

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  4. Under perfect competition, an individual firm’s supply curve is exactly the same as...

    the firm’s marginal cost curve for prices above the minimum value of average variable cost.

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  5. Which of the following BEST describes the overall impact of Franklin Roosevelt’s farm support programs?

    The price support programs helped farmers in the short run by raising prices and income levels. But nothing could bring demand up to meet supply, so eventually surpluses resulted — aggravated, in fact, by the very price increases that had been intended to help the farmer.

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  6. When price ceilings on beef were imposed under the Nixon administration, cattlemen responded generally by...

    creating a deliberate market shortage.

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Glossary

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