4.1.5 Productive and allocative efficiency

What is productive efficiency

Producing maximum output at lowest cost

When is productive efficiency achieved

At minimum average cost

Why can productive efficiency be wasteful

Goods people do not want may be produced

Why is there no spare capacity at productive efficiency

All resources fully used

How can productive efficiency be improved

Better management or better technology

What is allocative efficiency

Resources allocated to maximise social welfare

When is allocative efficiency achieved

Goods people want are produced

Why must goods be affordable for allocative efficiency

High prices reduce welfare

How does productive efficiency support allocative efficiency

It lowers prices

Which firms are allocatively efficient

Firms meeting consumer preferences

What does market orientation improve

Allocative efficiency

What does thinking at the margin mean

Considering an extra action

Why is marginal thinking important

It helps maximise utility

How does marginal thinking affect productivity

Important tasks are prioritised

What is marginal utility

Extra satisfaction from one more unit

Why is the demand curve downward sloping

Diminishing marginal utility

What happens to willingness to pay as consumption rises

It falls

What is opportunity cost

Next best alternative foregone

Why does opportunity cost matter for allocative efficiency

Scarce resources must be chosen carefully

What is productivity

Output per unit of input

What does higher productivity mean

More output from same input

What happens to average cost when productivity rises

It falls

What is labour productivity

Output per worker per hour

How is labour productivity used internationally

To compare country efficiency

What is one impact of higher productivity on prices

Prices may fall

What is one impact of higher productivity on employment

Demand for labour may rise

How does productivity affect competitiveness

Lower costs improve competitiveness

How can higher productivity affect profits

Profits increase

How can higher profits affect long run growth

More investment is possible

How can productivity affect wages

Workers may earn more

How does productivity affect economic growth

GDP increases

How can productivity be increased

Training and better machinery

What is human capital

Skills and health of workers

How does investment affect productivity

It increases efficiency

How does innovation affect productivity

Production becomes more efficient

Why does productivity matter for competitiveness

High costs mean higher prices