5. Allocative Efficiency
Allocative efficiency means that resources are
used for producing the combination of goods
and services most wanted by society. For
example, producing computers with word
processors rather than producing manual
typewriters.
6. Get The Book
These notes
were designed
to accompany
the book.
http://www.amazon.co.uk/OCR-AS-Level-Economics-Marketsebook/dp/B005GIEY6M/ref=sr_1_3?s=digital-text&ie=UTF8&qid=1315306189&sr=1-3
7. Get The Book
These notes
were designed
to accompany
the book.
http://www.amazon.co.uk/OCR-AS-Level-Economics-Marketsebook/dp/B005GIEY6M/ref=sr_1_3?s=digital-text&ie=UTF8&qid=1315306189&sr=1-3
Editor's Notes
When allocative efficiency is achieved, society is consuming and producers are producing the “right” combination of goods and resources—nothing is wasted.
When productive efficiency is achieved, firms are producing and using resources at the lowest possible cost—nothing is wasted. Goods are also sold at the lowest possible cost, meaning that the consumer benefits from productive efficiency as well as the producer.
Let's turn to the chart below. Imagine an economy that can produce only wine and cotton. According to the PPF, points A, B and C - all appearing on the curve - represent the most efficient use of resources by the economy. Point X represents an inefficient use of resources, while point Y represents the goals that the economy cannot attain with its present levels of resources.
As we can see, in order for this economy to produce more wine, it must give up some of the resources it uses to produce cotton (point A). If the economy starts producing more cotton (represented by points B and C), it would have to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A. As the chart shows, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output. However, if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small. Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy; the nation must decide how to achieve the PPF and which combination to use. If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production.
e.g. Southern States of the US.
Most official bodies, such as the Office for Budget Responsibility, reckon that the financial crisis and its aftermath did reduce Britain’s productive potential, but that there is still some spare capacity to be absorbed. An average of official estimates suggests that Britain’s output gap—the difference between where the economy is operating and where it would be if all resources were used—is just under 4% of GDP. The government’s severe fiscal plans are based on similar logic.
There are good reasons why Britain’s economy may have lost capacity. Finance, a highly productive industry, has shrunk. The credit crunch has made it harder for firms to get loans, hampering investment. Higher joblessness may have eroded skills.
However a new paper by Bill Martin of Cambridge University questions these suppositions. He argues that workers’ productivity has fallen in most industries, making it hard to maintain that the shrinkage of finance has seriously sapped Britain’s capacity. Nor is he convinced that a lack of credit is to blame, observing that capital was scarcely allocated towards highly productive sectors during the go-go years of the property bubble. Mr Martin also points to the contrast with America. If the financial crisis and deep recession slashed Britain’s productive potential, then presumably it would have done the same in America, which suffered a similarly big fallout. In fact America’s productivity growth soared during the recession as firms sacked workers faster than their output fell. It has remained strong since, as hiring has been more sluggish than growth.
Add all this up and Mr Martin argues that both America and Britain suffer from weak demand rather than enfeebled supply. The difference is that American firms reacted by slashing employment, whereas in Britain workers were willing to see their real incomes slump. Weak productivity, he argues, is the consequence of Britain adapting to weak demand, not evidence of sapped supply.
The debate may eventually be resolved by statistical revisions. If Britain’s recent GDP figures are revised up (as they often are eventually) then productivity will look less anomalous and the recovery less feeble. In the meantime Britain is stuck not just with a slow recovery, but a puzzling one too.
1. Allocative efficiency means that resources are used for producing the combination of goods and services most wanted by society. For example, producing computers with word processors rather than producing manual typewriters.
2. Productive efficiency means that least costly production techniques are used to produce wanted goods and services.
Full efficiency means producing the "right" (Allocative efficiency) amount in the "right "way (productive efficiency).
