Managerial Economics: Allocative and Productive Efficiency, Monopoly vs Perfect Competition, Affirmative Action

This document discusses the concepts of allocative and productive efficiency, the difference between monopoly and perfect competition, and affirmative action. It also explains the tradeoff between equity and efficiency due to affirmative action.

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MANAGERIAL ECONOMICS
PROBLEM SET 4

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Contents
Question 1..................................................................................................................................3
Question 2..................................................................................................................................3
Question 3..................................................................................................................................3
Question 4..................................................................................................................................5
Reference....................................................................................................................................7

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Question 1
The allocative efficiency is that point of the market where the resources are effectively used
for the production of the most needed goods of the society. Efficient allocation of the
resources as per the demand can increase social welfare as well.
Now, P= MC is the point where the allocative efficiency occurs as the price is the measure of
the relative worth of a product compared to the other product in a different market (Kreps,
2019). That means the marginal benefits that are extracted by the consumers of the market.
Marginal cost (MC) on the other hand measures the relative worth of the other good that the
economy could have produced if the resources were used for the production of that good. In
other words, while price measures the benefit to be enjoyed by the society, the marginal cost
measures the opportunity cost that is given up by society for the production of that good.
Under the perfect competition, automatic adjustment is possible that brings the system at an
equilibrium where P=MC (Pindyck & Rubinfeld, 2015). At this point, the marginal benefit of
the society becomes equal to the marginal cost and hence the resources are used as per the
needs of the society increasing the welfare of the society, therefore, P=MC indicate allocative
efficiency.
Question 2
The productive efficiency means the process of the product that uses the least cost techniques
for the goods and the services needed by the customers of the market. In this case, the
production unit is combining and using the resources in such a way that the output which is
produced uses the least-cost combination of the resources. Iossa & Martimort (2015) stated
that, at the perfectly competitive market, the firms must use the least cost techniques for
production in the long-run when a new firm enters the market. In failing to do so, the firm
will not be able to earn a normal profit from the market and hence eventually shut down. The
cost of production is lowest at the lowest point of the ATC curve that depends on the output
being produced by the firms in the market.
Question 3
The total surplus acquired by society as a whole determines the efficiency of the market
setting. There are a lot of differences between the perfectly competitive market and the
monopoly (Fine, 2016). In the monopoly market, the seller enjoys huge power over the price
of the market and hence sets the price at a higher level than that of a perfectly competitive

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market. The diagram below explains the efficiency of the two market setting using the
concepts of consumers’ surplus, producers’ surplus and the total surplus of the society.
Figure 1: The efficiency of the market structures
(Source: Martimort et al. 2015)
The monopolist maximizes the profit at the point where the MR=MC. Therefore, the price
charged by the monopolist is P and the quantity sold in the market in Q1. On the other hand,
the perfectly competitive firm maximizes the profit by setting P=MC. Therefore in a perfectly
competitive market, the price is E and the quantity sold in Q2. The price in the competitive
market is lower than the monopoly and the quantity sold is more (Horner, 2018).
The consumers’ surplus of the perfectly competitive market is the summation of the area=
(1+4+6)
The producers’ surplus in the perfect competition is the area shown by = (2+7). Thus, the
total surplus is = (1+4+6+2+7)
However, in the case of the monopoly, the price is set above the price is set by the perfectly
competitive market. In this case, the price is P, therefore the consumers’ surplus is only 1.
The producers surplus is = 4+2
Therefore the total surplus is = (1+4+2) which means the total surplus reduces by the area
equal to (6+7). This is known as the deadweight loss which is not accrued to the society as a
whole. Therefore, in terms of efficiency, perfect competition is better than that of the
monopoly markets.

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Question 4
Affirmative action is a policy under which a person's identity such as religion, sex, race,
colour is taken for the new provision of opportunity and betterment (Laroque & Salanié,
2017). The affirmative actions are mainly used by the government and private companies to
uplift a certain part of the society who are unable to take advantage of the growing economy.
The main aim of the affirmative action is to overturn or change any historical discrimination
that kept the section of the society away from the mainstream.
One of the major examples of affirmative action is the reservation from the side of the
government for the lower caste population in India. This provides extra advantages to the
lower caste people so that they can climb up to the mainstream smoothly (Skrentny, 2018).
The examples of affirmative action can also be seen in the workplaces as well when the
management decides to provide special advantages to the physically disadvantages members
of the society.
Discussion of the equity versus efficiency due to the application of the affirmative action
The main objective of the affirmative action as has been stated earlier is to provide more
advantage to a specific section of the society based on the identities such as the race, religion,
sex etc. This comes with a tradeoff between the equity of the opportunity and the efficiency
of the process. For example, if a company decides that it will provide more advantages and
relaxations to the disabled members of society, it can have two different aspects. First is the
distribution of the opportunity and rights that the company is providing to the special section
of the society (Arcidiacono & Lovenheim, 2016). Second is the productivity or the efficiency
of per unit labour that the company is giving up to make way for the disabled members of the
society.
Having equal opportunity in society is the basic human rights of all the individuals on the
planet earth. The other people not belonging to the exploited or the underprivileged or the
unfortunate section of the society has a responsibility to make sure that the special assistance
is provided to the people belong to these segment of the people. While the government does it
to adhere to the values of the country, companies mainly do it for maintaining an image in
society. This equal rights and opportunity create harmony in the society leading to an overall
happy and harmonious community.
On the other hand, not distributing the opportunities as per the merit and capabilities can have
a significant impact on the productivity of the economy of the country. Miller (2017) stated
when the opportunities are provided irrespective of the identities of the individual it goes to
the best resources of the nation which in turn increases the national productivity. The

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literature of economics is all about efficiency and the correct use of resources so that social
welfare is maintained. The economic indicators also get affected due to the affirmative
actions of the government and the private companies. For example, if a company hires more
of underprivileged persons with lower productivity than the general ones, to the production
process, the overall production will be low.
However, my opinion is that humans are social beings and holistic development rather than
selected prosperity is desirable. Affirmative action allows the people from the lower segment
of the economy who have been away from the gains of the economy for a long time to get
back to the mainstream. It also should be understood that the private companies are being
supported by the people from the society it is operating in and hence it must give something
back. Apart from that, when all the sections of the society are uplifted, it will also benefit the
sustainability of the economic operation as well. Therefore, in my opinion, the affirmative
actions are important for the societal balance and sustainability.

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Reference
Arcidiacono, P., & Lovenheim, M. (2016). Affirmative action and the quality-fit trade-
off. Journal of Economic Literature, 54(1), 3-51.
Fine, B. (2016). Microeconomics. University of Chicago Press Economics Books, pp. 78-91.
Horner, J. (2018, May). Report of the Editor: American Economic Journal: Microeconomics.
In AEA Papers and Proceedings (Vol. 108, pp. 686-93).
Iossa, E., & Martimort, D. (2015). The simple microeconomics of public‐private
partnerships. Journal of Public Economic Theory, 17(1), 4-48.
Kreps, D. M. (2019). Microeconomics for managers. Princeton University Press, pp.18-82.
Laroque, G., & Salanié, B. (2017). Edmond Malinvaud's Contributions to
Microeconomics. Annals of Economics and Statistics/Annales d'Économie et de
Statistique, (125/126), 41-56.
Martimort, D., Menezes, F., Wooders, M., Iossa, E., & MARTIMORT, D. (2015). The
Simple Microeconomics of Public-Private Partnerships. Journal of Public Economic
Theory, 17(1), 4-48.
Miller, C. (2017). The persistent effect of temporary affirmative action. American Economic
Journal: Applied Economics, 9(3), 152-90.
Pindyck, R. S., & Rubinfeld, D. L. (2015). Microeconomics. Boston: Pearson,, pp.98-103.
Skrentny, J. D. (2018). The ironies of affirmative action: Politics, culture, and justice in
America. University of Chicago Press, pp.81-102.