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| Unit | |
|---|---|
| Microeconomics | The part of economics concerned with single factors and the effects of individual decisions. |
| Revision Quizlet (200+ key terms) | |
| Macroeconomics | The branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity. |
One of the efficiency measures used by economists is that of Productive Efficiency. A firm is said to be productively efficient if it produces its product at the lowest possible unit cost (Average Cost). This is shown in Figure 11.8.
Figure 11.8
At output q, the firm in Figure 11.8 is able to produce at the most efficient level of output, i.e. the lowest average cost of production. This is cost c. ****So q is the productively efficient level of output.
We know that Marginal Cost (MC) always cuts Average Cost (AC) at its lowest point, so we can say that the productively efficient level of output is where:
$$ Marginal\space Cost = \text{Average\space Cost} $$
<aside> ❗ Productive efficiency is important in economics because if a firm is producing at its productively efficient level of output, it is ensuring that its resources are being combined as efficiently as possible with little to no resource loss.
</aside>
Allocative efficiency is a measure of efficiency that is sometimes called the socially optimum level of output. Allocative efficiency occurs when suppliers are producing the optimal mix of goods and services required by consumers.
Allocative Efficiency occurs at that point where
$Marginal\space Revenue = Average\space Revenue$
or
$Price = Marginal\space Cost$.
This means that suppliers are producing the optimal mix of goods and services required by consumers. In perfect competition, it is illustrated in the diagram below.
$$ \text{Allocative Efficiency}: MC = AR $$