Question

I'd this firm productively efficient? Is it allocatively efficiency? explain why or why not?

Answer 1

Productively efficient:

To be productively efficient means to produce the goods and services with the best combination of inputs. This combination will result in the maximization of the output with the minimum costs of production.

However, it should be noted that the economy or firms can only produce more of one good if they reduce the production of some other good. This is explained through the Production Possibility Frontier.

Suppose there is a Firm ABC and it producing certain goods and services.

Point 1 in the graph above means that the firm is able to produce the good and is achieving productive efficiency. At point 2 the firm is incurring no opportunity costs and thus can produce more and go beyond this point. Whereas, point 3 is not attainable by the firm.

A firm can be productively efficient but have very poor allocative efficiency.

Allocative efficiency:

It is mostly concerned with optimally distributing the resources. However, it is quite a difficult task to attain while also being productively efficient.

Example,

Firm A decides to produce a product Y only and thus distributes more than half of its resources into producing it. However, the Y product is not demanded by society.

The firm will achieve productive efficiency but not allocative efficiency.

Suppose nation B is distributing more than 80% of its GDP on its defenses. Although there is a productive efficiency it will not be able to use its resources on other important factors. Thus there is poor allocative efficiency.

A realistic example,

When the Soviet Union was under Communist, the factories at that time, there were told to focus production on only certain quantities of goods. They were able to obtain productive efficiency by working hard on them. But as these products were not needed by society, the distribution of the resources became and they were not able to achieve allocative efficiency.