Allocative Efficiency - Overview, How It Occurs, Key

Allocative efficiency means that the particular mix of goods a society produces represents the combination that society most desires. For example, often a society with a younger population has a preference for production of education, over production of health care. If the society is producing the quantity or level of education that the society Allocative efficiency is an economic concept regarding efficiency at the social or societal level. It refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of one more unit just equals the marginal cost. Allocative efficiency refers to an economic efficiency, where only socially desirable goods are produced and there is high demand for these goods. In other words, allocative efficiency level is achieved at the point of equality between marginal cost and marginal revenue or marginal benefit. Allocative efficiency It is when scarce resources are being combined in such a way to produce the highest number of output using the least cost method and these products are actually what the consumers desire the most as reflected by the value they place on it. Allocative efficiency is maximized when the marginal benefit = the marginal cost of producing one extra unit. Marginal Benefit = Marginal Cost If the marginal benefit exceeds the marginal cost, then people will be willing to pay a higher price than the economic cost of production, which therefore allows the manufacturer to increase profits by Key Points. Allocative efficiency occurs from the producers side as well as the consumers side. This is when demand is fully met, and production is optimised until marginal costs = marginal revenue – therefore no more profits are made.; In economics, allocative efficiency occurs at the point where supply and demand interesect. Allocative efficiency occurs when the products produced are those demanded and wanted by society. This does not mean that the products demanded are necessarily in the best interest of the Allocative efficiency would occur at the point where the MC cuts the Demand curve so Price = MC. The area of deadweight welfare loss shows the degree of allocative inefficiency in the economy. Allocative efficiency and productive efficiency. Productive Efficiency is concerned with producing goods at the lowest cost. This occurs on the Allocative efficiency is based on the amount of production, while productive efficiency is based on the method of production. For example, if the government allocated 90% of the Gross Domestic Product (GDP) to the production of guns, it will have achieved high productive efficiency but low allocative efficiency since the economy will be unbalanced. Allocative efficiency will occur at an output when marginal benefit (price) = marginal cost. We can say: Allocative efficiency occurs where price = marginal cost (MC) Monopolies are often said to be allocatively inefficient because they are able to set the price higher than marginal cost. See: Monopoly; Related to allocative efficiency is the

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