Economic efficiency is a broad term typically used in microeconomics in order to denote the state of best possible operation of a product or service market. Economic efficiency assumes minimum cost for the production of a good or service, maximum output, and maximum surplus from the operation of the market.
Why do economists define efficiency in this way?
Demand, Supply and Efficiency One typical way that economists define efficiency is when it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others.
When is production considered to be economically efficient?
Production of a unit of goods is considered to be economically efficient when that unit of goods is produced at the lowest possible cost. Economics by Parkin and Bade give a useful introduction to the difference between economic efficiency and technological efficiency:
What does it mean to have an economically efficient market?
In an economically efficient market outcome, there are no available Pareto improvements to be made, and the outcome satisfies what is known as the Kaldor-Hicks criterion. More specifically, economic efficiency is a term typically used in microeconomics when discussing production.
When does allocative efficiency occur on the producer side?
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.
How is Pareto efficiency related to productive efficiency?
Pareto efficiency. Pareto efficiency is related to the concept of productive efficiency. Productive efficiency is concerned with the optimal production of goods which occurs at the lowest point on the short run average cost curve and occurs on a PPF.
