Chapter Conclusion

This chapter has explored the meaning of "efficiency." We have defined "efficiency" in terms of costs and benefits. By this standard, the output of machines (or any other good or service) is efficient if the benefits from its production and use, net of the costs, are maximized.

In order to expand on the meaning of that definition, we have discussed a hypothetical economic plan for a very simple economy, Economia, a country that produces only two goods. We have found that the benefits are maximized the quantity produced is efficient) when marginal cost is equal to marginal benefit. Of course, this is another instance of the Equimarginal Principle.

We then recalled some of the things we have learned in previous chapters: the demand curve is the marginal benefit curve and, if markets are peerfectly ccompetitive, the supply curve is the marginal cost curve. Thus, when supply is equal to demand, marginal cost is equal to marginal benefit. This leads to the "fundamental principle of microeconomics:"

FUNDAMENTAL PRINCIPLE OF MICROECONOMICS: If

All goods, services and resources are paid for by those who benefit from them, and
the payment is at perfectly competitive equilibrium prices,
then
output quantities are efficient.

This is a powerful argument that markets, supply and demand promote efficiency -- in fact, an ideal plan could do no better. But when we think in terms of the Reasonable Dialog, it will come as no surprise that this argument is fallible. It is only as good as the assumptions on which it is based. When these assumptions are untrue, the Fundamental Principle of Microeconomics cannot be applied, at least not without modification and qualification. We will study some of these "exceptions" in the coming chapters.

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