2. • Identify the critical assumptions of the two-sector model
• Define what is meant by a Pareto-optimal allocation of
resources
• Articulate the three conditions for a general equilibrium
• Distinguish between allocative efficiency, X-efficiency, and
‘dynamic’ efficiency (or economic growth)
• Discuss the broad categories of market failure
• Explain the allocative, distributive, and stabilisation
functions of government
• Distinguish between direct and indirect forms of
government intervention.

3. • Individual consumer or producer is:
– Fully informed about the economy
– Unaffected by the actions of other consumers or producers
– Completely mobile
– Always striving to maximise his/her own utility of profit
• Disturbances will cause instantaneous adjustments
to return the system to a stable equilibrium.

4. • Optimal mix of commodities
• Interaction between:
– Consumption activities of consumers
– Production activities of producers
• Simultaneous concurrence of 3 conditions:
– Pareto optimality
– Maximising utility subject to budget constraints
– Producers and consumers achieve equilibrium
simultaneously.
Allocative efficiency refers to a situation in which the limited resources of a
country are allocated in accordance with the wishes of its consumers.

9. Technical efficiency or X-efficiency refers to a
situation in which existing resources are utilised in the most
efficient manner.

11. • Lack of information
• Friction and lags in adjustments
• Incomplete markets
• Non-competitive markets
• Macroeconomic instability
• Distribution of income.

12. • Market failures distort the allocation of resources in
the economy
• Incomplete markets
– Characteristics of goods and services prevent efficient
supply
– Existence of externalities.

13. • Fairness
• Inequality in income distribution
• Criteria for evaluation.

14. • Macro-economic objectives
• 3 premises of stabilisation (Keynes):
– The market economy is inherently unstable
– Macroeconomic instability is a form of market failure that is
highly costly to an economy
– Governments are able to stabilise the economy by means of
appropriate macroeconomic policies.
• New Classical Macroeconomics
• Neo-Keynsian theory.

15. Direct government intervention refers to the actual
participation of government in the economy.
Indirect government intervention to the regulatory
function of government.

16. • Actual participation in the
economy
• Tax individuals and
companies
• Borrow on financial markets
• Execute budgeted spending
• Examples:
– National defence
– Electricity
– Infrastructure
– Provision of school text
books
• Regulatory function
• Enacting law or proclaiming
legally binding rule
• Indirect taxes and subsidies
• Examples:
– Labour laws
– Anti-tobacco laws