The efficiency of firms
The output of productive efficiency occurs when a business in a given market or industry reaches the lowest point of its average cost curve implying an Exam technique advice Difference between Productive and Allocative Efficiency. Productive efficiency means producing without waste so that the choice is on the production possibility frontier. Allocative efficiency means that among the points on the production possibility frontier, the point that is chosen . Tips & Thanks. Using the production possibilities frontier as a method to show how the allocation of economic resources changes the economic output of any society, and how.
Thus, a homeless person may have no ability to pay for housing because they have insufficient income. Perfect competition, in the long run, is a hypothetical benchmark.
Allocative Efficiency and the Production Possibilities Frontier
For market structures such as monopoly, monopolistic competition, and oligopoly—which are more frequently observed in the real world than perfect competition—firms will not always produce at the minimum of average cost, nor will they always set price equal to marginal cost. Thus, these other competitive situations will not produce productive and allocative efficiency.
Moreover, real-world markets include many issues that are assumed away in the model of perfect competition, including pollution, inventions of new technology, poverty—which may make some people unable to pay for basic necessities of life—government programs like national defense or education, discrimination in labor markets, and buyers and sellers who must deal with imperfect and unclear information. The theoretical efficiency of perfect competition does, however, provide a useful benchmark for comparing the issues that arise from these real-world problems.
Summary Long-run equilibrium in perfectly competitive markets meets two important conditions: These two conditions have important implications.
First, resources are allocated to their best alternative use. Second, they provide the maximum satisfaction attainable by society.
Allocative efficiency looks at the marginal benefit of consumption compared to the marginal cost. Monopoly Related to allocative efficiency is the concept of social efficiency. Social efficiency makes a point of taking into account all externalities so we can try and equate social marginal benefit and social marginal cost.
Which is most important productive or allocative efficiency? There would be no point in being productively efficient if all resources are diverted to making guns. We could be producing on a production possibility frontier but, if it is all guns, society would not have enough food or health care.
An anecdote from the Soviet Union under Communist days tells how factories were given targets to produce certain quantities of goods. There is a story that one factory made left-hand boots that nobody wanted, so at the end of the day they would efficiently burn them and the next day start again!
Efficiency in perfectly competitive markets
They were productively efficient but not allocatively efficient. However, productive efficiency is still important.
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