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Key AS Micro Terms: Economic Efficiency
16th April 2011
Key terms related to economic efficiency are provided below and we link to related articles from recent economics blogs
Economic efficiency is about making the best use of our scarce resources among competing ends so that economic and social welfare is maximised over time
Allocative efficiency: Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production. The technical condition required for allocative efficiency is that price = marginal cost. When this happens, total economic welfare is maximised.
Productive efficiency: The output of productive efficiency occurs when a business in a given market or industry reaches the lowest point of its average cost curve. Output is being produced at minimum cost per unit implying an efficient use of scarce resources and a high level of factor productivity
Dynamic efficiency: Dynamic efficiency occurs over time. It focuses on changes in the consumer choice available in a market together with the quality/performance of goods and services that we buy. Economists often link dynamic efficiency with the pace of innovation in a market and also the degree of real competition between rival businesses
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.