4.1.5 Productive and allocative efficiency

Question 1

What is productive efficieny?

Answer 1

This is where a business supplies their goods and services in a effiecient way through high productivity levels which causes for avergae costs to fall. A firm is productively effiecient when producing on the lowest point of the LRAC curve (MES point).

Question 2

What is allocative efficiency?

Answer 2

Allocative efficiency is where a business is operating at the market equilibrium and its resources are being efficiently supplied to its consumers supplying exactly what they want and more importantly, the right quantity.

Question 3

How can a business increase its efficiency?

Answer 3

If a business increases its efficiency than its average costs are reduced. This may be done through:
* technological advancements (R&D)
* investing in skills and education training to develop higher human capital workforce.
* Higher quality management

Question 4

Explain investment in R&D

Answer 4

Investing in higher quality capital such as technology means it can increase output per unit of input, increasing levels of productivity which cause avergae costs to fall and rising returns to scale. Firm is now closer towards the MES scale and when average costs fall to lowest they will have reached MES meaning they are more productively efficient allowing the to supply output easier so also allocative efficient.

Question 5

Explain investment in training in education/skills training

Answer 5

Investing in education and training means the skills of exisiting workers can incresae (and future labourers) so the size of workforce in terms of human capital increases. Greater human capital means high productivity levels and average cots fall. When avergae costs fall to lowest point they have reached MES and are productively efficient which will allow them to be allocatively efficient.

Question 6

Explain quality of management

Answer 6

Greater quality of management means resources are being manages more efficiently. Thus inefficiencies and time wasting procedures can be cut as well as less management staff required. As a result AC fall and productive efficiency rises, eventually eading to allocative efficiency.