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Five Types of Economic Efficiency - Coggle Diagram
Five Types of Economic Efficiency
Allocative Efficiency
Occurs when all goods and services within an economy are distributed according to consumer preferences
Price always equals the marginal cost of production
The reason for this is that the price consumers are willing to pay for a product or service reflects the marginal utility they get from consuming the product.
X-Efficiency
X-efficiency occurs when a firm has an incentive to produce maximum output with a given amount of input. It is quite similar to productive efficiency.
The main difference between is that X-efficiency depends on management incentives, whereas productive efficiency depends on processes and technology.
Dynamic Efficiency
Dynamic efficiency occurs over time, as innovation and new technologies reduce production costs.
Dynamic efficiency is evident when an economy or firm manages to shift its average cost curve (short and long run) down over time.
It describes the productive efficiency of an economy (or firm) over time
This can be boosted by research and development, investments in human capital, or an increase in competition within the market.
Social Efficiency
Social Efficiency occurs when goods and services are optimally distributed within an economy, also taking externalities into account.
This is the case when the marginal social cost of production equals social benefit.
In a socially efficient economy, overall social welfare is maximized.
Productive Efficiency
That is the case when firms operate at the lowest point of their average total cost curve (i.e., where marginal costs equal average costs).
A productively efficient economy always produces on its production possibility frontier.
That means that the economy can’t produce more of one good or service without reducing the production of another one.
Productive efficiency occurs when the optimal combination of inputs results in the maximum amount of output at minimal costs.