Cambridge International as and a level Economics Ebook

SELF-ASSESSMENT TASK 
6.1
1
Explain what type of effi
ciency each of the 
following might lead towards.
a
A 
fi rm uses a new machine that costs less than 
the old one but produces more.
b
A company swaps production to a diff erent 
product that sells at the same price but is in 
greater demand.
c
A car plant makes 1,000 workers redundant 
because their jobs can now be done by robots 
that cost less over a period of time than paying 
workers’ wages.
d
Following privatisation, fi rms in an industry 
have to change what they produce in order to 
make a profi t.
2
Th
e use of the Internet has allowed consumers 
to purchase products from all over the world 
in a way that was not previously possible. It has 
been seen that this has greatly increased the 
level of competition faced by fi rms in diff erent 
markets as they now have to compete directly 
in a global market. Discuss the ways in which 
this development could lead to greater economic 
effi
ciency in world markets.
Quantity
1
2
3
4
5
6
7
Price 
(US$)
5
5
5
5
5
5
5
Marginal 
cost 
(US$)
2
3
4
5
6
7
8
Table 6.1 
132
Cambridge International A Level Economics

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Pareto optimality
Pareto optimality 
occurs when it is impossible to make 
someone better off without making someone else worse 
off . It is an optimal situation, with resources allocated in 
the most effi
cient way.
Pareto optimality: 
where it is impossible to make 
someone better off without making someone else worse off .
KEY TERM
Th
e concept can be simply applied using a production 
possibility curve (PPC) like that shown in 
Figure 6.2.
When an economy is operating on its PPC, it is not 
possible to increase the output of capital goods without 
reducing the output of consumer goods. In contrast, any 
point within the PPC, for example 
X,
would be Pareto 
ineffi
cient. Th
is is because it is possible to increase the 
output of either type of goods without reducing the 
output of the other.
If the allocation of resources is 
not
Pareto effi
cient, 
then there is scope for improvement; this situation is 
one where at least one person is made better off without 
making anyone else worse off . If there are welfare losses 
at a particular point on the PPC, the reallocation of 
resources will lead to Pareto improvement. In reality, 
any improvement in economic effi
ciency may require 
some form of compensation to be paid where individuals 
are worse off . A good example is the case of a new road 
scheme designed to improve the effi
ciency of the fl ow 
of traffi
c. Users of the new road benefi t because their 
journey times are shorter and their travel costs are likely 
to be reduced. Others though, for example those who 
might lose their homes, will be worse off unless they are 
paid appropriate compensation. Th
ose living close to the 
road will be adversely aff ected by additional noise and 
fumes and are unlikely to receive compensation. Th
ere is, 
however, an overall effi
ciency gain.
TOP TIP
The PPC is a relatively simple yet very appropriate way of 
explaining eff iciency.