![]() The allocation of resources results in sacrifices. These resources must be distributed to different productive units. At any given time an economy has access to a limited supply of resources. Productive efficiency is concerned with the allocation of resources. Productive efficiency and the allocation of resources The relationship between three kinds of efficiency The relationship between the three kinds of efficiency can be represented by the following (Venn) diagram. ![]() These extra goods can be distributed (allocated), thus making one or more people better off without making anyone else worse off. That is, by becoming productively efficient more goods are produced for no extra factor input. If a country is not productively efficient then it is possible to increase one consumer's welfare without making another worse off. Likewise, all allocatively efficient outputs must be productively efficient, but not vice-versa. For example, a technically efficient firm might employ $1m of capital and 10 workers to produce a given quantity, but by using $2m of capital and 2 workers it might produce the same quantity at lower cost. ![]() However, a firm that is technically efficient may not be productively efficient, since there may be some other bundle of the factors of production that might produce the same quantity of goods at a lower cost. For example, if a firm could employ fewer workers to produce the same amount of goods, then it is not technically efficient. Production is technically efficient when a given quantity of output is produced using the minimum quantity of factor inputs. There is also the concept of technical efficiency. Allocative efficiency is not necessarily a situation in which everyone obtains the same income or an equal distribution of goods. This means that it is not possible to produce more of any one good without producing less of another.Īllocative efficiency, which is also called Pareto efficiency is defined to be a situation where it is not possible to improve one consumer's welfare without making another consumer worse off.Ī distribution that is allocatively efficient can be “unfair” in the sense of unequitable. Productive efficiency is defined to be the production of goods and services at minimum cost.
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