Page 1: Understanding Efficiency

Definition of Efficiency

• Efficiency is defined as the allocation of goods and factors of production in an economy to their most valuable uses, minimizing waste.

• Real world efficiency involves:

  • Eliminating waste

  • Using minimal resources for maximum output

Example of Efficiency

• Washing Machine: An efficient washing machine operates at lower costs by minimizing water and energy waste, unlike an inefficient one that incurs higher costs.

• Company Operations: An efficient company meets deadlines with low costs, while an inefficient company faces delays and high expenses.

Market Efficiency

• Definition: Market efficiency relates to how well resources are allocated in a competitive market.

• Key Learning Points:

  • Understanding efficiency is crucial in economics, requiring a combination of One Note and textbook readings.

  • Knowledge of Demand and Supply Diagrams is essential as the concepts become more technical.

Key Characteristics of Efficiency

• Efficiency means making the best possible use of resources.

• It indicates the absence of overproduction or underproduction.

Page 2: Types of Efficiencies

Productive Efficiency

• Definition: Productive efficiency refers to producing goods using the fewest possible resources, implying the lowest possible cost.

• Implications:

  • Firms producing at this level combine resources effectively.

  • Points inside the Production Possibility Frontier (PPF) indicate resource underutilization (inefficiency).

PPF and Efficiency

• Points B, D, C on the PPF indicate productive efficiency.

• Point A illustrates productive inefficiency.

• Point X is unattainable with current resource levels.

Page 3: Allocative Efficiency

Definition of Allocative Efficiency

• Allocative efficiency requires not just productive efficiency but also producing the right combination of goods that meets societal preferences.

• This condition is referred to as Pareto Optimality.

Relationship Between Efficiencies

• A competitive market results in both allocative and productive efficiency, often termed economic efficiency.

• Example: In a wartime economy, prioritizing gun production over butter necessitates understanding allocative efficiency.

• Graphical Representation: The concept of allocative efficiency will be further explored using demand and supply graphs in subsequent sections.