Economic Efficiency

Question 1

Economic efficiency

Answer 1

• Is about a society making optimal use of scarce resources to help satisfy changing needs and wants

Question 2

Allocative efficiency

Answer 2

Is reached when no one can be made better off without making someone worse off

• Occurs when the value that consumers place on a good/service equals the cost of the factor resources used up in production.
• Market price = marginal cost of supply
• Occurs when resources are allocated in a way that maximises overall welfare or utility.

Question 3

Productive efficiency

Answer 3

Productively efficient when its operating at the lowest point on its average cost curve

Productive efficiency is achieved when a firm or an economy produces goods and services at the lowest possible cost.

Implies that resources are being used efficiently to minimise the wastage of resources

Also relates to when an economy is on their production possibility frontier

An economy is productively efficient if it can produce more of one good only by producing less of an another.

Question 4

Types of efficiency:

Answer 4

• Allocative
• Productive
• Social
• Dynamic

Question 5

Social efficiency

Answer 5

The socially efficient level of output/ or consumption occurs when marginal social benefit (MSB) = marginal social cost (MSC)

• The free market price does not always take into account social costs and benefits, individuals and firms only consider their marginal private benefit (MPB) = marginal private cost