Production efficiency
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As the population ages, the society will shift resources toward health care because the older population requires more health care than education. For example, in order to achieve allocative efficiency, a society with a young population will invest more in education. Only one of the productively efficient choices will be the allocative efficient choice for society as a whole.
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Determining “what a society desires” can be a controversial question and is often discussed in political science, sociology, and philosophy classes, as well as in economics.Īt the most basic level, allocative efficiency means that producers supply the quantity of each product that consumers demand. If the society is producing the quantity or level of education that the society demands, then the society is achieving allocative efficiency. For example, often a society with a younger population has a preference for production of education, over production of health care. When the combination of goods produced falls inside the PPF, then the society is productively inefficient.Īllocative efficiency means that the particular mix of goods a society produces represents the combination that society most desires. However, any choice inside the production possibilities frontier is productively inefficient and wasteful because it’s possible to produce more of one good, the other good, or some combination of both goods.įor example, point R is productively inefficient because it is possible at choice C to have more of both goods: education on the horizontal axis is higher at point C than point R (E 2 is greater than E 1), and health care on the vertical axis is also higher at point C than point R (H 2 is greater than H 1).Īny time a society is producing a combination of goods that falls along the PPF, it is achieving productive efficiency. As a firm moves from any one of these choices to any other, either health care increases and education decreases or vice versa. All choices along the PPF in Figure 1, such as points A, B, C, D, and F, display productive efficiency. Productive efficiency means that, given the available inputs and technology, it’s impossible to produce more of one good without decreasing the quantity of another good that’s produced. The production possibilities frontier can illustrate two kinds of efficiency: productive efficiency and allocative efficiency. Figure 1, below, illustrates these ideas using a production possibilities frontier between health care and education.įigure 1. An inefficient organization operates with long delays and high costs, while an efficient organization is focused, meets deadlines, and performs within budget. An inefficient washing machine operates at high cost, while an efficient washing machine operates at lower cost, because it’s not wasting water or energy. In everyday parlance, efficiency refers to lack of waste. This observation is based on the idea of efficiency. However, economics can point out that some choices are unambiguously better than others. In a market-oriented economy with a democratic government, the choice will involve a mixture of decisions by individuals, firms, and government. The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier.