4.1.5 Productive and Allocative efficiency Flashcards
productive efficiency
- Productive efficiency → minimise production costs by using the least possible quantity of real resources (output supplied at minimum unit cost)
- Minimises prices and helps to achieve the best possible standard of living
- Lean production → minimises the waste of resources
- Economy is on their production possibility frontier
- Depends on whether a firm needs to maximise production → eg niche
market, wasted units
allocative efficiency
- using resources so actual output is perfectly matched to consumer preferences (price = marginal cost)
- Involves responding to changes in consumer demand as quickly as possible
- Achieved when resources are used to yield the maximum benefit to everyone
- Output maximises customer welfare; economic welfare is maximised
how does the free market and firms aim to be efficient
- Free market should be able to satisfy both
- Supply and demand leads to firms producing according to consumer tastes and discontinue anything that isnt their taste
- Resources are transferred to more popular products
- ALLOCATIVE EFFICIENCY
- Businesses work to produce more efficiently → productive efficiency
- Research and innovation decreases costs
- Reduces labour needed and cuts prices
- Makes products more attractive as well as cutting costs
market imperfections causing a loss of efficiency
- Shift from producing to consumer tastes and uses advertising to persuade consumers to buy other things
- Push up prices by limiting output
- Avoid strong competition
MONOPOLIES - Make higher profits at the expense of allocative efficiency
- Priced higher than cost of resources used in making product
- Product is underconsumed as high price reduces demand and purchasing power
- Affects lower incomes families and reduces consumer welfare
- Leads to MARKET FAILURE → inefficient allocation of resources
dynamic efficiency
changes in the choice available in a market with the quality of products we buy
importance of allocative efficiency
- Allocative efficiency → relies on firms making changes at the margin all the time
- If new production techniques are available, businesses will adapt them to reduce production costs
- Profit causes production to be both economical and appropriate to needs and wants
However
- If production is not influenced by consumer tastes, allocative efficiency is insignificant
- Resources are wasted on products where there is little demand
- Allocative efficiency does not guarantee a living wage: exploitation vs highly paid managers
- Government policies can help (taxation etc)
increased productivity
- Technology
- Process innovation increased L productivity
- Tech that improves capital
- Capital intensive production raises labour P
Human capital
- Higher skills, training and education = higher productivity
- Greater flexibility of workers
Quality of management
- Organisation of workers is more efficient
- Lean production etc
- Good working conditions and company ethos
- Increased motivation with pay and relationships between stakeholders
why do firms want to produce according to tastes
- Market system rewards firms for producing according to consumer taste
- Sales are profits are an incentive to create consumer Tastes
- Resources are allocated efficiently
- Perfect competition: little greed of firms
however
- Many businesses do not product exactly what you want, but hope you wil want it
- Can lead to business failure
- Need market research and orientation
market orientation and efficiency
- Market orientation: studying consumer preferences and their markets
- Also innovation of products
- Market segmentation enables producers to cater for people on different - income levels so new technologies and designs benefit most people
- Innovative businesses raise standards across market → competition have to - to stay in business
