Friday 2 March 2012

Define productive efficiency. Does productive efficiency imply allocative effiency Explain.

According to Rasmussen (2011), productive efficiency is the ability of firms to maximize the utilization of their inputs at the minimal cost to realize maximum output. Productive efficiency is often realized by considering the minimal point Average cost (AC) that brings forth maximum output. From the aforementioned, firms that produce at the lower region in the long run are considered productive efficient and enjoy the economies of scale (Rasmussen 2011).

To a large extent, Yes. Allocative efficiency is a situation where individuals realize a better economic state by worsening off the economic state of other individuals (Mankiw 2011). This implies that for a positive impact in someone life, another person is paying the price i.e. is in a worst state. On the other hand, productive efficiency implies an economic state whereby to increase output of a product by a unit means a decrease or reduction of the production level of another good (Rasmussen 2011).

To realize allocative efficiency, the price that the consumers are willing and able to pay equals the unit cost of production i.e. Consumer price=Marginal Cost (Mankiw 2011). Given the aforementioned condition is realized, customer welfare is maximized. According to Rasmussen (2011), Productive efficiency entails the production of a given unit of output at the lowest unit per cost.

The lower unit per cost is realized when, MC=AC. Moreover, in the long run, Price = Marginal cost = Average cost (Mankiw 2011). This implies that, when a consumer is maximizing the state of their economic welfare i.e. at the point where Price = Marginal cost, firms are also producing efficiently at the same level where Marginal cost= Average cost. The illustration above clearly depicts that production efficiency imply allocative efficiency.

References

Rasmussen, S. (2011). Production Economics: The Basic Theory of Production Optimisation. New Mexico: Springer.

Mankiw,G.N.(2011). Principles of Economics. Michigan: Cengage Learning.

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