what is ment by allocative and productive efficency
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Allocative efficiency and productive efficiency are concepts used in economics to measure the effectiveness of resource allocation and production processes.
1. Allocative efficiency:
Allocative efficiency refers to a situation where resources are allocated in such a way that the production of goods and services matches the preferences of consumers. In other words, it occurs when the available resources are allocated to produce the right quantity and mix of goods and services that society wants.
To determine allocative efficiency, you need to consider two factors:
- Demand: It represents the preferences and willingness of consumers to pay for a particular good or service.
- Supply: It represents the quantity and quality of goods and services that producers are willing and able to supply.
Allocative efficiency is achieved when the marginal benefit (the additional benefit received from consuming one more unit) equals the marginal cost (the additional cost of producing one more unit). At this point, no further reallocation of resources can improve overall welfare without making someone worse off.
2. Productive efficiency:
Productive efficiency refers to a situation where goods and services are produced at the lowest possible cost, given the available technology and resources. It occurs when producers are utilizing their resources in the most efficient manner, minimizing waste and maximizing output.
To determine productive efficiency, you can consider the following factors:
- Cost of production: It includes labor, capital, and other inputs required to produce goods and services.
- Technology: The use of efficient production methods and techniques.
Productive efficiency is achieved when a firm achieves the lowest average cost of production. At this point, it is not possible to produce more of a particular good without increasing the cost or sacrificing the production of other goods.
In summary, allocative efficiency focuses on resource allocation based on consumer preferences, while productive efficiency focuses on minimizing production costs. Achieving both allocative and productive efficiency is essential for the optimal use of resources and maximizing societal welfare.