ECONOMIC EFFICIENCY

Economic problem: insufficient factors of production available to meet the needs of everyone in society

Efficiency: how well are resources allocated to achieve an optimal (best) allocation of resources

Economic Efficiency: a situation where resources are allocated so that economic welfare is maximised 

Several types of efficiency need to be identified:

Static Efficiency: this is concerned with how well resources are being allocated at a moment in time to meet the needs of society, eg what is the best combination of resources to produce the country's output of beer.

Static efficiency has two components:

a) Productive Efficiency: this is a situation where production occurs at the lowest average cost to producers, ie an output level where average costs are minimised, the firm is operating on the lowest point of its ATC curve

b) Allocative Efficiency: this is a situation where resources are being used to produce the goods which society wants, eg if consumers want to buy bread, is there sufficient bread being made to satisfy their needs.

Dynamic Efficiency: this is concerned with how well resources are allocated over time, eg is there sufficient R&D taking place to produce new goods to meet people's needs.

Traditional economic theory suggests that competitive markets would give the best allocation of resources. Competitive pressures would force firms to minimise their production costs and consumer sovereignty would mean that firms only produced the goods which consumers demanded at a price which reflected their valuation of the good.

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