2. what is the difference between productive and allocative efficiency

Figure 3. Brazilian Sugar Cane. Stack of raw sugar cane. Often, how much of a good a country decides to produce depends on how expensive it is to produce it versus buying it from a different country.

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 U. Due to its climate, Brazil can produce a lot of sugar cane per acre but not much wheat. Conversely, the U. Clearly, Brazil has a lower opportunity cost of producing sugar cane in terms of wheat than the U. The reverse is also true; the U. This can be illustrated by the PPF of each country, shown in Figure 4, below.

Figure 4. Brazil and U. When a country can produce a good at a lower opportunity cost than another country, we say that this country has a comparative advantage in that good. In our example, Brazil has a comparative advantage in sugar cane, and the U. One can easily see this with a simple observation of the extreme production points in the PPFs. The cookie is used to determine whether a user is a first-time or a returning visitor and to estimate the accumulated unique visits per site.

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This cookie tracks the advertisement report which helps us to improve the marketing activity. Others Others. Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet. 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 U. If the U. The slope of the PPF gives the opportunity cost of producing an additional unit of wheat.

With trade, goods are produced where the opportunity cost is lowest, so total production increases, benefiting both trading parties. Answer the question s below to see how well you understand the topics covered in the previous section.

This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times. Use this quiz to check your understanding and decide whether to 1 study the previous section further or 2 move on to the next section. Skip to main content. Module: Choice in a World of Scarcity. Search for:. Reading: Productive Efficiency and Allocative Efficiency Efficiency The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier.

Figure 1. Productive and Allocative Efficiency. Figure 2. List of Partners vendors. Allocational efficiency, also known as allocative efficiency, is a characteristic of an efficient market where capital is assigned in a way that is most beneficial to the parties involved. Allocational efficiency represents an optimal distribution of goods and services to consumers in an economy , as well as an optimal distribution of financial capital to firms or projects among investors.

Under allocational efficiency, all goods, services, and capital is allotted and distributed to its very best use. By definition, efficiency means that capital is put to its optimal use and that there is no other distribution of capital that exists which would produce better outcomes. Allocational efficiency occurs when organizations in the public and private sectors spend their resources on projects that will be the most profitable and do the most good for the population, thereby promoting economic growth.

This is made possible when parties are able to use the accurate and readily available data reflected in the market to make decisions about how to utilize their resources. When all of the data affecting a market is accessible, companies can make accurate decisions about what projects might be most profitable and manufacturers can concentrate on producing products that are most desired by the general population.

In economics, allocative efficiency materializes at the intersection of the supply and demand curves. At this equilibrium point, the price offered for a given supply exactly matches the demand for that supply at that price, and so all products are sold. In order to be allocationally efficient, a market must be efficient overall.

An efficient market is one in which all pertinent data regarding the market and its activities is readily available to all market participants and is always reflected in market prices. For the market to be efficient, it must meet the prerequisites of being both informationally efficient and transactionally or operationally efficient. When a market is informationally efficient, all necessary and pertinent information about the market is readily available to all parties involved in the market.

In other words, no parties have an informational advantage over any other parties.