How to Calculate Allocative Efficiency Using Excel
Allocative efficiency is a crucial concept in economics that signifies the optimal distribution of goods and services in a market. It occurs when the price of a good or service equals the marginal benefit consumers receive from it.
To determine allocative efficiency, market participants must have access data freely and make informed decisions about production and consumption. We show you how to find allocative efficiency in Excel using a graphical method.
Step 1: Prepare Your Data
To begin, you’ll need to gather and input your data into an Excel worksheet. Create a table with three columns: “Output”, “Marginal Benefit”, and “Marginal Cost”. Enter the corresponding data for each variable in their respective columns.
Step 2: Create the Graph
Select the data range containing the “Output”, “Marginal Benefit”, and “Marginal Cost” columns.
Go to the “Insert” tab and choose “Scatter Chart” with “Smooth Lines and Markers”.
This will generate a chart with two curves representing the marginal benefit and marginal cost of the product or service.
Step 3: Add Trendlines
- Right-click on each curve, and select “Add Trendline”.
- For both trendlines, choose “Linear” as the type of trendline.
- Check the “Display Equation on Chart” option for each trendline. This will display equations showing the slope and intercept of each curve.
Step 4: Calculate the Allocatively Efficient Output
To find the output level where marginal benefit equals marginal cost, set the two equations equal to each other.
You will have:
- MB (Marginal Benefit) = 20 – 0.2x
- MC (Marginal Cost) = 2 + 0.1x
- Set them equal: 20 – 0.2x = 2 + 0.1x
Solve for x:
0.3x = 18
x = 60
Step 5: Determine the Price at Allocative Efficiency
Plug the value of x into either equation to find the price where marginal benefit equals marginal cost. For instance, using the MB equation:
MB = 20 – 0.2(60)
MB = 8
Step 6: Label the Allocatively Efficient Point
Insert a text box on the chart, and type in the coordinates of the allocatively efficient point, which is (60, 8).
Step 7: Customize Your Chart
Add titles, labels, legends, or any other formatting you desire to make the chart more informative and visually appealing.
By following these steps in Excel, you can easily calculate allocative efficiency for a given product or service, providing valuable insights into the optimal distribution of goods and services within a market.
