Understanding Economic Efficiency and Trade

Equity and Resource Distribution

When it comes to more than two people, the meaning of the word equity is even more complex. The Rawlsian viewpoint emphasizes that an egalitarian distribution of resources can eliminate the incentive for most people to engage in productive endeavors, as they lose the wealth obtained as a result of taxes. This vision permits disparities that improve the welfare of the worst-off person in society. According to Rawls, a more equitable allocation of utility maximizes the well-being of the persons worse off in society.

Efficiency in Production

Assume that there are two offers with total fixed factors, and working capital, which are necessary for producing the same two products: food and clothing. Now suppose that instead of only two people, there are many people who have the factors of production and obtain a rent to sell. This income is allocated in turn to the two goods. This model agglutinates different elements of supply and demand of the economy.

• Efficiency in production:

Efficiency of Factors

To see how factors can be effectively combined, we must search for various combinations of factors that can be used to produce each of the two products. A factor assignment in the process of technically efficient production is possible if the production of one of the goods cannot be raised without reducing that of the other. The production contract curve represents all the technically efficient factor combinations. All items that are not in this contract curve for the production of two goods are inefficient, as isoquants passing through each of these items are short.

• Efficiency of factors:

Production Possibility Frontiers

The production possibility frontier samples the different combinations of food and clothing (2 properties) that can occur with fixed quantities of labor and capital and maintaining continued streaming technology. The marginal rate of transformation of the production possibility frontier is concave, meaning its slope increases with more food. The marginal rate of transformation is defined to describe the transformation of dress into food as the magnitude of the slope of the border for each item. The RMT measures the amount of dress one must waive to produce a unit of food.

• Production possibility frontiers:

Production Efficiency

An economy that is efficient not only has to produce the goods with a minimum cost, but it should also produce them in combinations for which individuals are willing to pay.

• Production efficiency:

The Benefits of Free Trade

International trade is beneficial in an exchange economy.

• The benefits of free trade:

Comparative Advantage

Comparative advantage is the situation in which country 1 has an advantage over country 2 in the production of a good because the cost of producing it in 1, in connection with the cost of producing other goods in 1, is less than the cost of producing it in 2, in relationship with the cost of production in 2 of other goods. Absolute advantage is the situation in which country 1 has an advantage over country 2 in the production of a good because the cost of producing the good in 1 is less than the cost of producing it in 2.

• Comparative advantage:
• Absolute advantage:

Expansion of the Production Possibilities Frontier

If there is a comparative advantage, international trade allows a country to consume beyond its production possibility frontier.

• Expansion of the frontier of production possibilities: