Allocative Efficiency - Unit 1 Year 11 Econs

What is the definition of efficiency? (In economic terms)

If altering what was produced or how it was produced could make everybody better off (or at least some with affecting others), then a process would be considered efficient.

What are the 3 prerequisites for society to achieve full economic efficiency?

1. Efficiency in production (productive efficiency)
2. Efficiency in consumption

3. Efficiency in specialisation and exchange

Explain efficiency in production

Producing goods at minimum cost (any other method of production would cost more)

Explain efficiency in consumption

Where consumers must allocate their expenditures as to get maximum satisfaction from their income

Explain efficiency in specialisation and exchange

Where firms special in making goods to sell to customers, and where individuals specialise in doing jobs in order to buy goods, so that everyone maximises the benefits they achieve relative to the costs of achieving them

Random additional info I ceebs making a question for

In any economic activity, allocative efficiency will be increased as long as doing more of that activity (and hence less of the alternative) involves a greater marginal benefit than marginal cost

A more precise definition of allocative efficiency is at an output level where the Price equals the Marginal Cost (MC) of production.

• This is because the price that consumers are willing to pay is equivalent to the marginal utility that they get.

• Therefore, optimal distribution is achieved when the marginal utility (or marginal benefit) of the good equals the marginal cost.