Productive efficiency - Wikipedia
Efficiency. The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier. In a market-oriented. All choices along a PPF display productive efficiency—it is impossible to use . Allocative efficiency means that the particular mix of goods a society It might be easiest to understand this relationship by taking a look at the two PPFs below. .. and X has a decent likelihood of being caused by a creator god, therefore I'm. regarding the relation between privatization and efficiency do not lead to any definitive ment of the impact of the firm's ownership on productive and allocative Suzanna CHAN (lxxx): “God's Little Acre” and “Belfast Chinatown”: Diversity.
The PPF and comparative advantage While every society must choose how much of each good it should produce, it does not need to produce every single good it consumes. Often a country—one type of society—decides how much of a good to produce based on how expensive it is to produce the good versus buying it from a different country.
Productive vs allocative efficiency
As we saw earlier, the curvature of a society's PPF gives us information about the tradeoff between devoting resources to producing one good versus another. In particular, its slope gives the opportunity cost of producing one more unit of the good in the x axis in terms of the other good in the y axis.
Countries tend to have different opportunity costs of producing a specific good, either because of different climates, geography, technology, or skills.
Suppose two countries, the United States and Brazil, need to decide how much they will produce of two crops: Due to its climatic conditions, Brazil can produce a lot of sugar cane per acre but not much wheat. On the other hand, the United States can produce a lot of wheat per acre but not much sugar cane.
Brazil has a lower opportunity cost of producing sugar cane—in terms of wheat—than the United States. The reverse is also true: It might be easiest to understand this relationship by taking a look at the two PPFs below.
This graph shows two images. Both images have y axes labeled sugar cane and x axes labeled wheat. In image B, the United States' sugar cane production is nearly half the production of its wheat. In our example, Brazil has comparative advantage in sugar cane, and the United States has comparative advantage in wheat.
Take a look at the PPFs of the two countries. If Brazil devoted all of its resources to producing wheat, it would be producing at point A. If, however, it devoted all of its resources to producing sugar cane instead, it would be producing a much larger amount, at point B. By moving from point A to point B, Brazil would give up a relatively small quantity in wheat production to obtain a large production in sugar cane. The opposite is true for the United States.
If the United States moved from point A to point B and produced only sugar cane, its choice would result in a large opportunity cost in terms of sacrificed wheat production. Another way to think about this is to take the slope of the PPF, which gives the opportunity cost of producing an additional unit of wheat.
While slope is not constant across different PPFs, we can still see that the PPF in Brazil is much steeper than in the United States, and therefore the opportunity cost of wheat is generally higher in Brazil.
When countries engage in trade, they specialize in the production of the goods that they have comparative advantage in and trade part of that production for goods they do not have comparative advantage in.
In this case, that would mean that the United States would export wheat to Brazil, and Brazil would export sugar cane to the United States. With trade, goods are produced where the opportunity cost is lowest, so total production increases, benefiting both trading parties. Key concepts and summary A production possibilities frontier, or PPF, defines the set of possible combinations of goods and services a society can produce given the resources available.
The shape of the PPF is typically curved outward, rather than straight, due to the law of diminishing returns. Over time, a growing economy will tend to shift its PPF outwards.
The curvature of the PPF is likely to differ by country, which results in different countries having comparative advantage—lower opportunity cost—in different goods. Total production can increase if countries specialize in the goods they have comparative advantage in and trade some of their production to other countries for other goods. Self-check questions Let's return to our hypothetical society that must choose between healthcare and education. Suppose there is an improvement in medical technology that enables more healthcare to be provided with the same amount of resources.
How would this affect the PPF and, in particular, how would it affect the opportunity cost of education? This would make the PPF steeper, corresponding to an increase in the opportunity cost of education—increasing resources devoted to education would now mean forgoing a greater quantity of healthcare.
Could a society produce in a way that is allocatively efficient but productively inefficient? Allocative efficiency requires productive efficiency because it pertains to choices along the production possibilities frontier.
Both show a tradeoff between having more of one good but less of the other. Both show the opportunity cost graphically as the slope of the constraint. Review questions What is comparative advantage? What does a production possibilities frontier illustrate?
Why is a production possibilities frontier typically drawn as a curve, rather than a straight line? Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it. What are diminishing marginal returns?
What is productive efficiency? It also suffered many human casualties, both soldiers and civilians. It is clear that productive inefficiency is a waste since resources are being used in a way that produces fewer goods and services than a nation is capable of producing.
Rent-seeking behavior often occurs as monopolies seek to acquire or maintain government —granted monopoly privileges. Such rent-seeking may entail substantial cost lobbying, legal fees, public relations advertising etc.
There are several policy options available when monopoly creates substantial economic inefficiency: Society may choose to regulate its prices and operations if it is a natural monopoly. Society may simply ignore it if the monopoly appears to be short-lived because of changing conditions or technology.
- The production possibilities frontier and social choices
Efficiency Vs technological advances: Allocative efficiency is improved when technological advance involves a new product that increases the utility consumers can obtain from their limited income. Process innovation can lower production cost and improve productive efficiency. Innovation can create monopoly power through patents or the advantages of being first, reducing the benefit to society from the innovation.
Usually, productive efficiency refers to the short run i. Related to productive efficiency is the concept of technical efficiency.
Technical efficiency specifically refers to the optimal combination of inputs, i. Allocative Efficiency definition Allocative efficiency is quite different and is more concerned with the distribution and allocation of resources in society. Allocative efficiency looks at the marginal benefit of consumption compared to the marginal cost. Monopoly Related to allocative efficiency is the concept of social efficiency. Social efficiency makes a point of taking into account all externalities so we can try and equate social marginal benefit and social marginal cost.