Economics efficiency is when the resources is used in the best possible
case, which means the most amount of wants can be satisfy by a limited amount
of resources. There’s 2 ways to achieve economic efficiency, productive efficiency
is when a business produces a product at the lowest possible cost with the least
amount of material
As for the graph, the average cost of
Production is decreasing in the short run
Due to economies of scale, which is when
Business gain advantage from producing
more material, at x it will reach constant
return to scale which is constant average cost
and finally, is when it increasing in average
cost due to diseconomies of scale.
Allocative efficiency gives the consumer the maximum amount of satisfaction by
their given income, the price they willing to pay will equivalent to the satisfaction
they gain from the product.
Productive only exist in when an economy is
producing on the boundary of the graph, Y instead of X, X
indicate that the economy is not outputting the maximum
amount of capital goods and consumer goods with the
given material, and the beyond the curve is where it can’t
produce at that point due to insufficient of materials.
The minimum resources possible resources are being use to make products, this is
call productive efficiency.
Competition can lead to productive efficiency, as there is competition in
the market, businesses are force to maximize their resources to produce the most
output to stay competitive in outputs and prices. This can lead to lower cost of
production and may increase the business profit as the cost per product is being
cut.
This in the short run may help the business to cut the cost and make more money,
which can be achieve by economies of scale to reduce the average cost per
product, or training employees to make less faulty product. However, in the long
run, businesses that failed to the adapt will be less demanded and may lead to
bankrupt as their price is not competitive enough, many workers will lose their
job, business owner and shareholder may go into debt, this can overall lead to
productive inefficiency.
Allocative efficiency can exist in a competitive market. Firms will produce the
most desired product with relative to its cost of production. It will be motivate by
profit to produce the products, this will satisfy more demand and can help the
business gain more revenues, also they will have to product it in order to stay
competitive or other business going to step it, this could potential cause some
firm to close.
Market failure can happens when many business is close, this can result in
monopoly, which is when a business is taking over in a market, and the business
can push the price up as there is no longer competition, this will result the
consumer have to pay higher prices for the product, for example the cost of
product is 3, and the consumer is willing to pay 5, but now the cost have been
push up to 7, allocative inefficiency will happen. However, if there is economies of
scale, the cost of production will be push down which can help both the producer
to gain more revenues and the consumer can buy at the willing prices.
Also government can intervene with it by giving loans to business to survive
before monopoly happens, this will result to a shift in a supply curve as now the
cost of production have been cut down, the supply curve move to the right from S
to S’, this will result to a decrease in equilibrium prices, and more demand will be
achieve. This can the business survive longer and gain more profit as the cost
have already been cut down
However, this will only help the business
in the short run as this effect does not last
long. Also the government will be losing
money when giving loans out to businesses.
In conclusion, public sector intervention isn’t the only way to achieve economic
efficiency as the business can stay more competitive themselves, by training
worker or have a better strategy in term of marketing and pricing. Also, by giving
out loans to business, that is only the short-run solution to the problem, however
the government won’t have money to build infrastructure or provide publics
good, this can also affect the economic efficiency in the long run