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Chapter 12: Problem 2

What is meant by allocative efficiency? What is meant by productive efficiency? Briefly discuss the difference between these two concepts.

Short Answer

Expert verified
Allocative efficiency is about optimal distribution of goods and services, taking into account consumer preferences, ensuring that the price of goods or services equals the marginal cost. Productive efficiency refers to producing maximum output with given resources without increasing the production of another good. It involves operating at the minimum cost per unit and is related to minimal waste in production. The difference lies in their focus; productive efficiency is about minimizing waste in production and allocative efficiency is about optimally distributing resources to match consumer preferences.

Step by step solution

01

Define Allocative Efficiency

Allocative efficiency refers to a state of the economy wherein resources are allocated in a way that maximizes the net benefit attained through their use. In other words, it represents the optimal distribution of goods and services, taking into account consumer's preferences. Under allocative efficiency, the price of goods or services equals the marginal cost. This is deemed optimal because it is at this point that the individual's willingness to pay is equivalent to the producer's marginal cost.
02

Define Productive Efficiency

Productive efficiency, on the other hand, is achieved when an economy is unable to possibly produce more of a good without decreasing the production of another. It refers to a situation where a firm operates at its minimum cost per unit. In simpler terms, it is about producing goods or services at the lowest possible cost. In an environment of productive efficiency, firms are operating on their 'production possibility frontier'.
03

Discuss the difference between Allocative and Productive Efficiency

While both concepts speak about 'efficiency', they function on different levels within an economy. Productive efficiency is primarily concerned with producing maximum output with given resources, and is related to the minimization of waste in the production process. Allocative efficiency, however, is about matching production with consumer preference and attaining a distribution of resources that is socially optimal. It corresponds to the optimal mix of output in an economy.

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Most popular questions from this chapter

Suppose that each of the following is true: (1) The laptop computer industry is perfectly competitive, and the firms that assemble laptops do not also make the displays or screens; (2) the laptop display industry is also perfectly competitive; and (3) because the demand for laptop displays is currently relatively small, firms in the laptop display industry have not been able to take advantage of all the economies of scale in laptop display production. Use a graph of the laptop computer market to illustrate the long-run effects on equilibrium price and quantity in the laptop computer market of a substantial and sustained increase in the demand for laptop computers. Use another graph to show the effect on the cost curves of a typical firm in the laptop computer industry. Briefly explain your graphs. Do your graphs indicate that the laptop computer industry is a constant-cost industry, an increasing-cost industry, or a decreasing-cost industry?

Explain whether each of the following is a perfectly competitive market. For each market that is not perfectly competitive, explain why it is not. a. Corn farming b. Coffee shops c. Automobile manufacturing d. New home construction

What is the difference between a firm's shutdown point in the short run and in the long run? Why are firms willing to accept losses in the short run but not in the long run?

Explain why it is true that for a firm in a perfectly competitive market, \(P=M R=A R\).

Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition \(M R=M C\) is equivalent to the condition \(P=M C\).
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