Productive and allocative efficiency

What is productive efficiency?

Productive efficiency occurs when resources are used to produce the maximum possible output at the lowest cost, with no spare capacity left.

How can firms achieve productive efficiency?

By improving management techniques or employing more advanced technology to maximize output while minimizing costs.

What is allocative efficiency?

Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the marginal cost of the scarce factor resources used up in production.

What is the key difference between allocative and productive efficiency?

Productive efficiency focuses on maximizing output at the lowest cost, while allocative efficiency ensures that resources are allocated to produce the goods and services most desired by society.

How does productive efficiency support allocative efficiency?

Productive efficiency helps keep costs and prices down, making goods and services more affordable, which supports allocative efficiency by increasing consumer satisfaction.

How do market-oriented firms enhance allocative efficiency?

By producing goods and services that meet consumer preferences, thereby maximizing consumer satisfaction and social welfare.

Why can productive efficiency sometimes lead to a trade-off between consumers?

Because all resources are used to their maximum potential, benefiting one consumer by reallocating resources may disadvantage another due to the lack of spare capacity.

What does "thinking at the margin" mean?

It refers to considering the impact of an additional action, such as producing or consuming one extra unit of a good or service.

Give an example of thinking at the margin.

Working an extra hour to produce 6 more units of output, but considering that each unit takes 10 minutes.

Why is marginal thinking important?

It helps consumers focus on future actions to maximize utility rather than dwelling on past decisions.

What is marginal utility?

The additional satisfaction or benefit gained from consuming one extra unit of a good.

What does the law of diminishing marginal utility state?

As more units of a good are consumed, the additional satisfaction (marginal utility) from each extra unit decreases.

Why is the demand curve downward sloping?

Because diminishing marginal utility causes consumers to value each additional unit less, leading them to pay less for extra units.

What is opportunity cost?

The value of the next best alternative foregone when a choice is made.

How does opportunity cost relate to scarcity?

Since resources are scarce, choices involve trade-offs, and selecting one option means sacrificing another, leading to opportunity costs.

How does marginal thinking help achieve allocative efficiency?

By prioritizing choices that maximize utility and meet consumer needs and wants, leading to the optimal allocation of scarce resources.

What is productivity?

Output per unit of input (e.g., worker) per period of time (e.g., hour).

How is labour productivity measured?

Output per worker per hour, often measured in terms of real GDP produced per unit of labour per hour.

How does increasing productivity affect average costs?

It lowers average costs by producing more output with the same input, reducing cost per unit.

What effect can increased productivity have on consumers?

It can lead to lower prices, increasing demand and potentially raising employment levels.

How does higher productivity affect a firm’s international competitiveness?

By lowering costs and prices, making the firm more competitive in international markets.

What can firms do with higher profits from increased productivity?

Invest in growth and innovation, leading to long-term improvements and potentially higher productivity.

How can increased productivity improve the standard of living?

By enabling firms to pay higher wages, improving worker well-being and overall economic growth.

Name two ways to increase productivity.

Training workers and using more advanced capital machinery.

What is human capital, and how can it be improved?

Human capital refers to the skills and health of workers, which can be improved through education, training, and healthcare.

How does investment affect productivity?

Easy access to credit enables firms to invest in capital and innovation, boosting long-term productivity.

How does technological innovation influence productivity?

It enhances the production process, increasing both productivity and allocative efficiency.

How does productivity affect a firm's competitiveness?

Higher productivity reduces costs, allowing firms to offer lower prices, making them more competitive.