Management Environment - Research Paper Example

This is meant to ensure maximization of profits and minimization of losses. Allocative efficiency comes about when firms or industries produce the kind of goods and services that the consumers desire most. A firm allocates resources in the process of production in such a way that the benefits derived from the use of the product are maximized. All the productive processes employed by firms or industries are aimed at utilization of the meager (or limited) resources available to meet the expectations of the consumers.

Here, consumer is the centre of focus and everything is designed to meet his/her desires. Bearing this in mind, the firm starts battling with two issues; the marginal cost (m.c.) which is the additional or extra cost incurred by producing an extra unit and the marginal benefit (m.b.) which is the benefit derived from utilizing an additional unit produced. If the additional cost of an additional unit of production is less than the benefit derived from consuming the extra unit of production, then the firm would be advised to extend the scale of production.

This is because the benefits outweigh the cost and so the firm has a room to offer more utility. On the contrary if the cost incurred in producing an extra unit is more than the marginal benefit the firm would be advised to stop putting extra resources in the pr. GRAPH ACThis means that the firm is utilizing factors of production at the lowest cost; the firm is also employing the best technology within its reach; the production processes employed by the firm are the best; the firm ensures maximum exploitation of the economies of scale (financial economies, technological economies, research economies, human resource economies among others) and ensures that the production process is least wasteful with regard to resource utilization.

To sum up productive efficiency is attained when the cost incurred in production is at its lowest. This is given by the lowest average cost on the average cost curve, which depicts the lowest price on the average total cost curve.GRAPH (Average Total Cost)For the allocative efficiency and productive efficiency to reach a compromise other factors have to be considered. The production costs have to be viewed in the light of market power and price tags attached on the products. The level of market power determines by how much the price is higher than the marginal cost.

For instance, a market supplied by one firm (monopolistic product market) is bound to experience high prices since there is only one price determinant. But this is only applicable where demand is inelastic, meaning that changes in price either will not affect demand or will have minimal effects on demand. Price D Perfectly inelastic demand D QuantityIn an oligopolistic product market (where there are many firms supplying the market) a firm makes its own decisions concerning prices.

But firm prices have to reflect the other prices in the market. In