Economic Efficiency
Economic efficiency is when objectives of the individual, firm or government are attained by the combination of the various factors of production at a minimum cost. Efficiency can be measured in different forms; productive, allocative and X-efficiency.
Productive Efficiency
In evaluating the productive efficiency of a market, we are looking at the minimum cost derived as a result of producing or supplying a good. In the short term, efficiency is achieved when a unit of output is attained at the very base of the average cost curve as shown in Fig 1a below. FIG 1a Cost FIG 1b Cost Economic Efficiency in the long run MC AC LRAC C1 SRATC1 Economic Efficiency SRATC2 C In the short-term Ce 0 Q Output 0 Q1 Qe Output From Fig 1b above, the market productive efficiency level can be best measured in the long run. In the long run, the various short term output levels on the scale of production compared, reveals the most minimum cost as a result of producing a unit more of output. As shown in Fig 1b, the most efficient level of production is at CeQe on the short run average total cost 2(SRATC2) as compared to C1Q1 on SRATC1 though if the cost of production were considered separately in the short run for SRATC1, the most productive efficient level would have been C1Q1. With the economy, productive efficiency is achieved on any point of the Production Possibility Frontier curve, which reveals the various points of the production of consumer goods