Lecture notes 4.1.5 Productive and allocative efficiency

4.1.5 Productive and allocative efficiency



Productive efficiency

 The distinction between productive efficiency and allocative efficiency
 Resources used to give maximum possible output at lowest cost
 Helps maximise consumer welfare
 No spare capacity
 Can be achieved by improving management or more technology
 Can only be improved with use of correct management techniques

Allocative efficiency

 Resources are allocated in the best interest of society
 Firms are more allocatively efficient when they produce to meet consumer needs
 Market orientated firms increase allocative efficiency

Margin

 The effect on an additional action
 Marginal increase or marginal cost
 Allows consumers to keep thinking ahead
 Marginal utility is the extra satisfaction from consuming one extra unit
 Demand curve slopes down due to diminishing marginal utility
 Consumer surplus declines with extra units consumed

Opportunity Cost

 The loss of an alternative due to the choice of another
 Every time consumers decides

Trade-offs

 Choosing more of one and less of another

Increased productivity to reduce AC through efficiency

 Productivity = Output / Input
 Being more productive means the same input but produces more output
 Productivity is measured with labour productivity
 Lower cost of production
 Lower prices for consumers
 Increase economic demand
 Higher employment
 Increased investment
 Pay higher wages
 Economic growth
 Human capital is workers who are employed by a firms