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What Is Economic Efficiency
What Is Economic Efficiency
What Is Economic Efficiency
Economic efficiency means the using of resources in such a way as to maximize the production of goods
and services. Economic efficiency exists when
No one can be made better off without making someone else worse off.
Productive efficiency
It is achieved when production of goods is achieved at the lowest cost possible.
Look at the PPC diagram below. Point X shows Productive inefficiency. This is because the output is not
optimum and there are still resources left unused. Whereas, Point Y shows productive efficiency, as this is
the maximum output which can be achieved through the utilizing all resources.
In long-run equilibrium for perfectly competitive markets, this is where average cost is at the base on the
Average Cost curve. (MC=AC). In the diagram below q is the point of productive efficiency.
Allocative efficiency
Allocative efficiency is a situation in which the limited resources of a firm are allocated in accordance with
the wishes of consumers. An allocatively efficient economy produces an "optimal mix" of commodities. In
short, the products that are most wanted must be produced.
A competitive market can lead to Allocative efficiency because the firms are forced to produce what the
customers want.