Allocative Efficiency, Productive Efficiency, and Equality: Study with Video Lessons, Practice Problems & Examples

Efficiency in microeconomics encompasses productive efficiency, where maximum output is achieved at the lowest cost, and allocative efficiency, which aligns production with consumer preferences. The production possibilities frontier illustrates attainable and unattainable production points. While efficiency focuses on output, equality addresses the fair distribution of economic benefits, raising ethical considerations in resource allocation. Understanding these concepts is crucial for analyzing market dynamics, consumer behavior, and the implications of government policies on economic equity.

Efficiency and Productive Efficiency

Now we'll discuss the ideas of efficiency and equality and how they relate to microeconomics. So first, we'll talk about Efficiency and that means that a society is getting the maximum benefits from its scarce resources. Right? And when we talk about efficiency, we're usually talking about productive efficiency, which is basically the same definition: that we're maximizing output at the lowest possible cost. We're getting the max benefits from the scarce resources. Right? So I'm going to take this example to, so you can understand productive efficiency. Let's take it to this graph, and I'm going to introduce a graph that we're going to deal with a lot more later, but I'm just going to kind of deal with it on a high level, no math here, just kind of, discuss this concept of efficiency. Okay. And here we're going to see the economy very similar, to, you know, what you might find at one of your universities here. Right? So at this economy, everything they produce is either deep dish pizzas or light beer. Okay? And let's say they took all of their efforts and produced only light beer. Right? Maybe they could produce this much light beer and no pizza. They could also take all their effort and put it into pizzas and make no light beer, and let's say they could end up somewhere around here on this point. They could also, you know, split their production to have a mix of light beer and pizza, and they could end up basically anywhere along this line here. So they could be maybe somewhere here and producing some pizza and some light beer. Right? And I want to show you something about this graph is actually that you can also be producing say in here maybe at this point, But at that point, yes, we're producing some pizza and some beer, but we could have expanded our production and still had resources to do it. We could have, you know, made more pizza, or we could have made more beer with our same resources. So the idea is that this point in here, we're going to call this point let me go back to red. We're going to call this point inefficient because we could have gotten more from our same resources. Right? And we'll call these points along the line. So I'm going to trace the line in black here to show you what I'm talking about. This line along that line, that is our productive efficiency. That is where we are being productively efficient, we could say. Right? So productive efficiencies. Whoops. Let me get my pen back. Productive efficiencies. Anywhere along that line. Right? We could be producing all this light beer up at the top and no pizza and it'll be productively efficient or anywhere along that line or only all those deep dish pizzas and no beer, all of it's productively efficient. And the idea of it being attainable or unattainable, So the idea of anything inside this curve so anything I'm going to highlight here in yellow, this is all attainable to us. Right? These are all production mixes that we can attain with our resources. And then, everything out here is unattainable. Right? We there's no way we could make more than that one. That's just further than that's just more than our resources will allow. K? So inside that yellow area, I'll put it out here, the yellow area is attainable because we have the resources to do it, and that blue area is unattainable with our current resources. And we're going to dive into that more. Right? The idea here is that we're reaching efficiency when we're along that line.

Allocative Efficiency

So now let's talk about this other type of efficiency, allocative efficiency. And this is where production represents consumer preferences. Okay? So before we were talking about making the most with what we had, this is more about making the correct mix of stuff based on our consumers. Right? It's a bit more subjective. You can't be expected to just know what the consumers want. This is the kind of information that's going to be given to you on the test, and then you'll have to find the point of allocative efficiency or something like that.

As an example here on our graph, let's talk about a couple of different schools and their allocative efficiency point, right? Maybe you're at a school like FSU. Big party school, right, loves their cheap beer. Right? And they might find that their most allocatively efficient point on the graph might be somewhere around up here. Right? Point A on the graph. Lots of light beer, lots of cheap beer, no pizza. Pizza is not a worry. They don't need sustenance. They can get by just on the beer here. So, FSU, let's put something like lots of beer, no pizza. So their allocated efficiency point would be somewhere around point A, right? They're still productively efficient but they're just making the right stuff for their consumers.

What if you're at a school like NYU where they have really good pizza,, oh, well, I put deep-dish pizza. So this should really be some kind of Chicago school. So let's say you're at the University of Illinois in Chicago, right, and you still like beer. Right? You still need your cheap beer because you're in college. You can't afford the good stuff, but you still need pizza too. Right? You've got that really good pizza, so your allocative efficiency point might be somewhere here in the middle where you're getting some pizza and some beer, right? So let's write that in here. Some pizza, some beer, point B.

So both of these points reach allocative efficiency. Here, sorry. Let me get out of the way there. Both of these points do reach allocative efficiency. It's just a matter of consumer preference. Right? What do the consumers want? And that's what we're going to produce. So why don't we move on to the next video?

Equality

So let's move on to the next topic here, the idea of equality, right? We've been talking about efficiency to this point. How do we make the right stuff? How do we make as much as possible? But this is more about the distribution of this production. Equality is talking about the fair distribution of the economic benefits. So the idea of getting my fair share. And in this course, we're definitely going to be spending a lot more time on efficiency than equality, but it is going to come up when we're dealing with policy making and government intervention in the market, things like that. But let's look at our example; equity often has to do with ethics too. Maybe it is even ethical, you know, to produce at point A? These people that only have beer and no sustenance. Yes. I know the Seminoles can get by in that lifestyle, but is it ethical? Right? These kinds of questions are what we're dealing with when we're talking about equality. Not really as key to this course, but you'll see that it is important to economics to make sure that the distribution of resources is also happening in an equitable way. Cool. So let's move on.

Here’s what students ask on this topic:

What is the difference between productive efficiency and allocative efficiency?

Productive efficiency occurs when a society produces goods and services at the lowest possible cost, maximizing output from its scarce resources. This is represented by points on the production possibilities frontier (PPF). Allocative efficiency, on the other hand, is achieved when the mix of goods and services produced matches consumer preferences. It is more subjective and depends on what consumers value most. For example, a college that prefers beer over pizza will have a different allocative efficiency point compared to one that values both equally. Both types of efficiency are crucial for understanding how resources are utilized and distributed in an economy.

How does the production possibilities frontier (PPF) illustrate efficiency?

The production possibilities frontier (PPF) is a graph that shows the maximum possible output combinations of two goods that an economy can achieve using its resources efficiently. Points on the PPF represent productive efficiency, where resources are fully utilized. Points inside the PPF indicate inefficiency, as more of one or both goods could be produced with the available resources. Points outside the PPF are unattainable with current resources. The PPF helps visualize the trade-offs and opportunity costs involved in production decisions, highlighting the concept of efficiency in resource allocation.

Why is equality important in economics?

Equality in economics refers to the fair distribution of economic benefits among individuals in society. While efficiency focuses on maximizing output and aligning production with consumer preferences, equality addresses how these benefits are shared. It raises ethical considerations, such as whether it is fair for some individuals to have access to more resources than others. Equality is important because it can impact social stability, economic growth, and overall well-being. Policymakers often consider equality when designing interventions to ensure that economic benefits are distributed more equitably, balancing efficiency with fairness.

What are some examples of allocative efficiency in real-world scenarios?

Allocative efficiency occurs when the mix of goods and services produced aligns with consumer preferences. For example, in a college town where students prefer cheap beer over pizza, the allocative efficient point would involve producing more beer and less pizza. Conversely, in a city known for its gourmet pizza, the allocative efficient point might involve producing more pizza and less beer. Another example is healthcare: if a society values healthcare highly, allocative efficiency would involve allocating more resources to healthcare services. These examples illustrate how allocative efficiency varies based on consumer preferences and societal values.

How do government policies impact allocative efficiency and equality?

Government policies can significantly impact both allocative efficiency and equality. For instance, subsidies and taxes can alter production and consumption patterns, aligning them more closely with societal preferences and achieving allocative efficiency. Regulations can ensure that essential goods and services are available to all, promoting equality. However, policies must be carefully designed to avoid unintended consequences, such as market distortions or inefficiencies. Balancing efficiency and equality often requires trade-offs, and policymakers must consider the ethical implications and long-term effects of their decisions on resource allocation and distribution.