Define allocative efficiency. Explain the significance of this concept in economics?
What will be an ideal response?
Allocative efficiency is an efficiency criterion that describes a situation where the marginal benefit (or marginal valuation) of the last unit purchased is equal to the marginal cost of producing that unit. In other words, allocative efficiency occurs when production reflects consumer preferences. This is a significant concept in that all societies face scarcity which necessitates that societies make choices about what goods and services to produce. To maximize society's wealth, resources must flow to their highest valued use. This value is determined by consumers.
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The government budget deficit is
a. the difference between government purchases and government revenues from bonds and taxes b. caused by a lack of business sector investment c. created when the government expenditures exceed net taxes d. caused by leakages in the economy e. is created by government injections
Explain why real business cycle theorists believe that business cycles are not a problem