The term refers to the production of maximum goods at the minimum possible cost. Economic efficiency includes two broad concepts. One concept states that the production should be done at the minimum possible cost and there…
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Together these two concepts form the basis of economic efficiency.
Economic efficiency is nothing but the presence of both production and allocative efficiency. Production efficiency is another name of cost efficiency. The term can be mathematically defined as following:
The figures 1.a and 1.b above show the necessary conditions for productive efficiency. In Figure 1.a, productive efficiency is achieved where point MC curve has intersected the ATC (Average Total Cost) curve. At this point, the production of Q1 goods is going to cost the least and at this point productive efficiency will be obtained. The same is shown in Figure 1.b. The point where MC interests the ATC curve is the point where the firm is experiencing the minimum possible costs. Any production at this point is going to achieve the necessary conditions for productive efficiency.
The allocative efficiency is always achieved at a point where the minimum amount of effort produces the maximum result. In other words, any change in resources are not going to increase the output because the currently employed resources are producing the maximum output. If there is room for increasing production by changing the resource allocation, then the point of allocative efficiency is not achieved. In figure 2, the point “C” is not allocative efficiency because resources are underemployed and output can be increased by employing more resource. However, Point “A” and “B” are both allocative efficient because resources are producing the maximum output. There is no room for the increase of the production at this point until there is technology advancement or increase in the population, both of which are long-term considerations.
Economic efficiency can be looked at from another point of view. Economic efficiency can be described as something that maximizes the benefit of a transaction for both producers and consumers. The benefits for consumer and producers can be looked upon as consumer and
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