Productive vs allocative efficiency | Economics Help
Efficiency. The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier. In a market-oriented. Efficiency requires full employment of available resources and full production. Allocative efficiency means that resources are used for producing the may entail substantial cost (lobbying, legal fees, public relations advertising etc.) which. Allocative efficiency occurs when all goods and services within an economy are distributed according to consumer preferences. In this scenario price always equals marginal cost of production. In many cases this is what happens over time, as innovation helps to improve This relationship can be illustrated as follows.
On the other hand, the marginal benefit, which is the benefit to society of the last unit, also declines with increasing quantity. Since the amount that consumers are willing to pay for a particular product depends on the marginal benefit of the last unit produced, a producer can maximize profit by producing more units until the marginal cost of producing the last unit is equal to the marginal benefit of that unit to society.
Note that, in economics, economic cost also includes the profit that would satisfy the producer. Therefore, we can derive a simple formula for maximizing allocative efficiency. Allocative efficiency is maximized when the marginal benefit equals the marginal cost of producing one extra unit.
When allocative efficiency is maximized with respect to the good, then the manufacturer is producing the good in the exact quantities that society desires. On the other hand, if the manufacturer produces more goods than what society desires, then the price they are willing to pay will be less than the economic cost of production, and will cause profits to drop.
Expanding the Production Possibilities Frontier The assumptions of the production possibility frontier simplify the analysis of the effect of allocating resources differently. Over time, however, the production possibility frontier can be expanded.
Increases in the production possibility frontier will be made possible by increased resources, such as population growth, advances in technologyand also by the application of technology, such as developing irrigation systems so that more arid land can be used for farming. However, the largest expansion of the production possibility frontier of any economy will probably result from advances in technology, especially computer, network, robotics, and artificial intelligence technology.
Not only do computers reduce the need for resources, but robotics will increasingly reduce the need for human labor. With the aid of computers, networks, and robotics, each person will be able to do more and more, thereby greatly increasing the productivity of each individual. Furthermore, the Internet can quickly distribute information and knowledge to anyone who wants it, improving productivity. Consider the simple elimination of paper.
The Internet, computers, e-readers, and other portable devices allow the creation, distribution, and consumption of information and knowledge in an electronic format. Content can be created on computers, distributed by the Internet to anywhere in the world for virtually no cost, then read on portable devices.
Five Types of Economic Efficiency - Quickonomics
This reduces the need for the many trees required to manufacture paper, the need for delivery vehicles and their requirement for fuel and other maintenance, the need of publishing houses and distribution centers, such as bookstores, and their associated land and labor.
Note that economic growth will always be uneven, that the production of some goods can become more cost-effective faster than other goods.
However, when the cost of producing a good decreases, it also frees economic resources for the production of other goods or services. An economy's choice of how much to invest in capital and consumer goods will determine how fast future growth will be.
A greater investment in capital goods over consumer goods will usually result in faster future growth but at the expense of current consumption.
International trade also allows a nation to benefit from the comparative advantage of other countries. Thus, by using the cheaper labor in China and India, United States manufacturers and service providers can lower their production costs, which benefits American consumers. The production possibility frontier can also be expanded by eliminating anything that causes unemploymentsuch as discrimination based on race, sex, or any other quality and by eliminating unnecessary bureaucracies and laws.
For instance, by greatly simplifying the tax code, people would be able to do their own taxes, eliminating the need for tax preparers, and many accountants and tax lawyers. It would also minimize the many economic distortions created by a complicated tax code.
For example, producing computers with word processors rather than producing manual typewriters. Productive efficiency means that least costly production techniques are used to produce wanted goods and services. Full efficiency means producing the "right" Allocative efficiency amount in the "right "way productive efficiency. And the marginal cost of producing product X measures the relative worth of the other goods that the resources used in producing an extra unit of X could otherwise have produced.
In short, price measures the benefit that society gets from additional units of good X, and the marginal cost of this unit of X measures the sacrifice or cost to society of other goods given up to produce more of X. Under pure competition, this outcome will be achieved. Dynamic adjustments will occur automatically in pure competition when changes in demand or in resources supply, or in technology occur.
Productive vs allocative efficiency
Price of non-perfect competitive firms will exceed marginal cost, because price exceeds marginal revenue and the firms produce where marginal revenue MR and marginal cost are equal. Then the firms can charge the price that consumers will pay for that output level.
Allocative efficiency is not achieved because price what product is worth to consumers is above marginal cost opportunity cost of product. Economies of scale natural monopoly may make monopoly the most efficient market model in some industries.