the production of the combination of products that best satisfies consumers' . Explain the difference between allocative efficiency and productive efficiency. This short video for AS Micro looks at productive and allocative efficiency. Levels: AS; Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC. Print page. Usually, an increase in production, ceteris paribus (other things being equal), will mean that allocative efficiency has improved. However, if the increase in.
Allocative efficiency is not achieved because price what product is worth to consumers is above marginal cost opportunity cost of product. Economies of scale natural monopoly may make monopoly the most efficient market model in some industries.
Productive vs allocative efficiency
X-inefficiency, the inefficiency that occurs in the absence of fear of entry and rivalry, may occur in monopoly since there is no competitive pressure to produce at the minimum possible costs. Rent-seeking behavior often occurs as monopolies seek to acquire or maintain government —granted monopoly privileges. Such rent-seeking may entail substantial cost lobbying, legal fees, public relations advertising etc. There are several policy options available when monopoly creates substantial economic inefficiency: Society may choose to regulate its prices and operations if it is a natural monopoly.
Society may simply ignore it if the monopoly appears to be short-lived because of changing conditions or technology. Efficiency Vs technological advances: Allocative efficiency is improved when technological advance involves a new product that increases the utility consumers can obtain from their limited income.
Process innovation can lower production cost and improve productive efficiency. Innovation can create monopoly power through patents or the advantages of being first, reducing the benefit to society from the innovation. Innovation can also reduce or even disintegrate existing monopoly power by providing competition where there was none.
Productive vs allocative efficiency | Economics Help
In this case economic efficiency is enhanced because the competition drives prices down closer to marginal cost and minimum average total cost. Allocative efficiency is concerned with the optimal distribution of goods and services.
An economic could be productively efficient in producing large numbers of boots, but if they were all for the left foot, it would be allocatively inefficient as no one would benefit from these low production costs.
Definition of productive efficiency This is defined as producing goods and services for the lowest cost. Productive efficiency is said to occur on the production possibility frontier.
On the PPF curve, it is impossible to produce more of one good without producing less of another. In the diagram below. Point D in the graph is productively inefficient because you can produce more goods or services without an opportunity cost.
Usually, productive efficiency refers to the short run i.
Related to productive efficiency is the concept of technical efficiency. Technical efficiency specifically refers to the optimal combination of inputs, i. Allocative Efficiency definition Allocative efficiency is quite different and is more concerned with the distribution and allocation of resources in society.