4.1.5 Productive and Allocative efficiency Flashcards

1
Q

productive efficiency

A
  • 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
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2
Q

allocative efficiency

A
  • 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
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3
Q

how does the free market and firms aim to be efficient

A
  • 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
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4
Q

market imperfections causing a loss of efficiency

A
  • 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
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5
Q

dynamic efficiency

A

changes in the choice available in a market with the quality of products we buy

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6
Q

importance of allocative efficiency

A
  • 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)

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7
Q

increased productivity

A
  • 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

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8
Q

why do firms want to produce according to tastes

A
  • 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

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9
Q

market orientation and efficiency

A
  • 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
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