Allocative efficiency is a theoretical measure of the benefit or utility derived from a proposed or actual selection in the allocation or allotment

of resources.[1][2] Although there are different standards of evaluation for the concept of allocative efficiency, the basic principle asserts that in any economic system, choices in resource allocation produce both "winners" and "losers" relative to the choice being evaluated. The principles of rational choice, individual maximization, utilitarianism and market theory further suppose that the outcomes for winners and losers can be identified, compared and measured. Under these basic premises, the goal of maximizing allocative efficiency can be defined according to some neutral principle where some allocations are objectively better than others. For example, an economist might say that a change in policy increases allocative efficiency as long as those who benefit from the change (winners) gain more than the losers lose.
Allocative efficiency, also known as Pareto efficiency, was put forward by Italian economist Vilfredo Pareto. Pareto noticed that 80% of the land and wealth in Italy was owned by 20% of the population. Pareto analyzed other areas and found the same. This theory was also known as 80/20 rule. Another economist, Dr. Joseph M. Juran also found some similar instances and referred to it as a universal principle, which he named as 'Vital Few and Useful Many'. The instances of 80/20 theory can also be found in today's complex business economics. Some of the instances are

About 20% of the entrepreneurs earn more than 80% of the population in the world. In sales, 80% of business comes from 20% of the customer base and 20% of the customers make 80% of the complaints! Also 80% of a town's traffic is managing on a mere 20% of road availability.

Allocative efficiency can be defined as a condition in the market structure where all of resources are allocated in such a way so as to maximize the net profit achieved through their use. This is one of the standard allocative efficiency definitions. Allocative efficiency refers to a situation in which the limited resources of a company/country are allocated according to consumer's wishes. Allocative efficient economy produces an 'optimal mix' of commodities. This method of measuring profit can be implemented in various organizations, both public and private. In short, allocative efficiency is all about having more benefits while producing relatively few liabilities. This theory is more or less similar to the law of supply and demand and demand and supply analysis. Productive and Allocative Efficiency Productive efficiency is defined as the production of goods and services at minimum cost. It can be measured by the total number of output produced from a given quantity of inputs. Organizations depend on the efficiency of their production managers, commonly known as operation managers, as it is the revenue generating aspect of any company. That is why it is often called the 'sharp end' of any business. In productive efficiency, it is impossible to produce more of one goods without producing less of another. One way of measuring economic efficiency is in terms of the market value of outputs produced with a given quantity of inputs. Consumers will always be willing to pay a little extra if the product is of high quality. The companies can achieve higher benefits if they are able to deliver these high quality goods to the consumers at affordable prices. Allocative efficiency is a different mode of efficiency of an organization. When determining allocative efficiency, the desirability of the goods in the society is the primary parameter rather than the number of goods produced as in productive efficiency. For example, an economy may produce a surplus of leisure items like cars, phones, etc., but at the same time if it produces sufficient quantities of lifesaving drugs, then the economy can be thought of as one employing both productive and allocative efficiency. Allocative Efficiency Example Let us take some examples to illustrate allocative efficiency. Let us consider a scenario in an economy where two people A and B have two goods, rice and wheat. Person A likes rice and does not want to have wheat and person B likes wheat and dislikes rice. There are 10 bags of rice and

wheat each. As per allocative efficiency, A should have all the bags of rice and B should have all the bags of wheat. For any other kind of distribution, A will have some bags of wheat and B would have some bags of rice. So as per allocative efficiency only the goods that are desirable by a consumer should be made available to him. Applications of Allocative Efficiency Allocative distribution can greatly benefit in the following areas:

It can help an organization in reducing customer complaints It can prove to be useful in having a better organizational structure It can help in Six Sigma implementation in your organization. Allocative efficiency, on an individual level can help in managing personal finances and better time management

So, this was a bit about allocative efficiency. Along with the numerous other analytic theories, organizations today use this as a tool to prioritize their plans so as to achieve maximum profit keeping societal responsibilities in mind. Although it is a very vast topic, we have tried our best to help you with some valuable information.

Allocative Efficiency

Allocative efficiency is a condition wherein all the available resources of an economy are allocated in the best systematic way. Let us take a look at the topic in detail...

llocative efficiency, also known as Pareto efficiency, was put forward by Italian economist Vilfredo Pareto. Pareto noticed that 80% of the land and wealth in Italy was owned by 20% of the population. Pareto analyzed other areas and found the same. This theory was also known as 80/20 rule. Another economist, Dr. Joseph M. Juran also found some similar instances and referred to it as a universal principle, which he named as 'Vital Few and Useful Many'. The instances of 80/20 theory can also be found in today's complex business economics. Some of the instances are

About 20% of the entrepreneurs earn more than 80% of the population in the world. In sales, 80% of business comes from 20% of the customer base and 20% of the customers make 80% of the complaints! Also 80% of a town's traffic is managing on a mere 20% of road availability.

Allocative efficiency can be defined as a condition in the market structure where all of resources are allocated in such a way so as to maximize the net profit achieved through their use. This is one of the standard allocative efficiency definitions. Allocative efficiency refers to a situation in which the limited resources of a company/country are allocated according to consumer's wishes. Allocative efficient economy produces an 'optimal mix' of commodities. This method of measuring profit can be implemented in various organizations, both public and private. In short, allocative efficiency is all about having more benefits while producing relatively few liabilities. This theory is more or less similar to the law of supply and demand and demand and supply analysis. Productive and Allocative Efficiency Productive efficiency is defined as the production of goods and services at minimum cost. It can be measured by the total number of output produced from a given quantity of inputs. Organizations depend on the efficiency of their production managers, commonly known as operation managers, as it is the revenue generating aspect of any company. That is why it is often called the 'sharp end' of any business. In productive efficiency, it is impossible to produce more of one goods without producing less of another. One way of measuring economic efficiency is in terms of the market value of outputs produced with a given quantity of inputs. Consumers will always be willing to pay a little extra if the product is of high quality. The companies can achieve higher benefits if they are able to deliver these high quality goods to the consumers at affordable prices.

Allocative efficiency is a different mode of efficiency of an organization. When determining allocative efficiency, the desirability of the goods in the society is the primary parameter rather than the number of goods produced as in productive efficiency. For example, an economy may produce a surplus of leisure items like cars, phones, etc., but at the same time if it produces sufficient quantities of lifesaving drugs, then the economy can be thought of as one employing both productive and allocative efficiency. Allocative Efficiency Example Let us take some examples to illustrate allocative efficiency. Let us consider a scenario in an economy where two people A and B have two goods, rice and wheat. Person A likes rice and does not want to have wheat and person B likes wheat and dislikes rice. There are 10 bags of rice and wheat each. As per allocative efficiency, A should have all the bags of rice and B should have all the bags of wheat. For any other kind of distribution, A will have some bags of wheat and B would have some bags of rice. So as per allocative efficiency only the goods that are desirable by a consumer should be made available to him. Applications of Allocative Efficiency Allocative distribution can greatly benefit in the following areas:

It can help an organization in reducing customer complaints It can prove to be useful in having a better organizational structure It can help in Six Sigma implementation in your organization. Allocative efficiency, on an individual level can help in managing personal finances and better time management

So, this was a bit about allocative efficiency. Along with the numerous other analytic theories, organizations today use this as a tool to prioritize their plans so as to achieve maximum profit keeping societal responsibilities in mind. Although it is a very vast topic, we have tried our best to help you with some valuable information.

http://www.buzzle.com/articles/allocative-efficiency.html

Law of Supply and Demand

In the field of micro economics, the law of supply and demand forms an integral part of how the markets work. In the following article, a quick elaboration of how the world of commerce and business depends on this law has been explained. To know more, read on...

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The law of supply and demand, as mentioned above, forms the basis of the world of commerce and economics. Law of supply and law of demand are basically two different laws, which deal with market participants and their psychology and behavior. Law of Supply and Demand Commerce and economics started with one very elementary economic unit - a market. The concept of market has not changed much, even after several centuries and several aspects of a market remain the same including the law of supply and demand. Definition of this law is not a single statement, but a concept pertaining three different dimensions. The three primary constituents of any market include, supply, demand and price.

Supply is the measure of all commodities and goods that are sent to the market for sale. Now, a certain confusion over the stored goods exists. Some consider stored goods to be a part of supply, whereas some do not. In normal circumstances however, goods in storage are not deemed to be a part of supply as they are not actually out for sale. Demand is defined to be the willingness of consumers to buy a commodity, with certain financial backing. A price is basically, the consideration for which the transaction takes place. Price is basically the medium of exchange.

These elements are permanent constituents of any market, and in the absence of even a single one, the market would not function. Now, proceeding to the law of supply and demand. What is the Law of Supply and Demand The law of demand and supply, though two different laws, tend to act within the same market. The common market mechanism goes as, the seller brings in the commodity into the market, a certain cost that includes production cost plus a profit margin. The buyers in return buys the product. Now, the rule of thumb goes that the more the number of supplied units the less is the cost going to be. That is, if the supplied units exceed the demanded units then the price of the commodity drops. In the reverse case, the lesser the supplied units, the more is the cost going to be. That is when the supplied units are lesser than the demanded units the price is always going to be high. One must note that this is just a rule of thumb and there are several exceptions and assumptions to the rule. However, these two demand and supply forces are successful in establishing the market price of any commodity. This principle or rather rule of thumb is known as the law of equilibrium, and is applicable in almost all the markets in the world. The law of supply and the law of demand always act like extensions of the equilibrium. As mentioned above, the law of supply and demand are two different laws that tend to govern the market.

The law of supply, governs the behavior of the supplier that is the behavior of the producer or the seller. The simply fine logic is that once the price of one commodity gets higher due to excess demand and low supply, the producer or the supplier tends to increase the supply of the same commodity with an intent to make good revenue at a high established price. In this process the price comes down due to the new increased supply. The second one is of course the law of demand and works in relation with the price. As per this law, the more the price of the commodity, the lesser is the demand. The less demand causes the supply to exceed demand. There are however exceptions.

The aforementioned principles and rules are observed more like rules of thumbs, that is, they are applicable, in almost all cases but not always. The perceptions, demand and supply and price always differ from case to case, and hence demand and supply analysis of all markets is done. I hope that the elaboration on law of supply and demand is resourceful. Good luck.

Demand and Supply Analysis

In the discipline of economics, there are several different types of analysis theories that have been put down by several different economists. The demand and supply analysis is one such theory that has been propagated by many famous economists. The following article, is a brief elaboration of concepts of demand and analysis and related terms and theories. To know more, read on...

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Returns www.beyondinsights.net Dear Readers, Economics is a very important discipline of modern commerce, that has been progressing since the era of barter exchange. After theindustrial revolution and modernization of the globe, the discipline of economics has received a special importance and also a significant practical base. Economics is often defined as the art, science and mathematics of human needs and ways to fulfill human needs. There are many economists who have come up with a number of theories, in order to define the satisfaction of human wants and monetary and non monetary means of addressing these wants. David Ricardo, Adam Smith and James Denham-Steuart are probably the first three economists, who have advocated and improvised the theory of demand and supply analysis. If you are a student of economics, statistics or finance, then this analysis and its theory, are your new religion as it forms the basis of all concepts of economics, finance along with monetary, fiscal and statistical theories. Genesis of Demand and Supply Analysis The genesis of the demand and supply analysis can be traced back to the 1767, when James Denham-Steuart used the term in the book, Inquiry into the Principles of Political Economy. The actual logic of the concept of demand and supply was used by economics legend Adam Smith in his book Wealth of Nations. The analysis was further enhanced by some of the laws, that were put forth by David Ricardo in the book Principles of Political Economy and Taxation. Though every economist used some or the other different theory and analysis in the process of explaining the statistics of demand and supply, the basic logic that is used is the same. Demand and Supply Analysis The logic of demand and supply analysis in economics is not very complicated. I am not about to bombard you with some difficult, incomprehensible laws and formulas. This a very simple explanation of supply and demand analysis. So here goes... Any transaction has two dimensions, namely a demand and a supply. Let us take an example of, say, cheesecakes. The number of cheesecakes that can be produced, becomes the supply of cheesecakes and the number that have been purchased and consumed, or can be purchased, becomes the demand. The definition of aggregate demand and supply analysis, comes into picture in this scenario. In any market, the number of units of a commodity that a consumer has the will and ability to pay for, becomes the demand for that particular commodity in the market and any

producer that has the will and ability to produce those units, becomes the supply. It is not necessary that the demand and supply volumes will match. The aggregate demand and supply analysis is based on this difference between the demand and supply forces. You can have a look at the diagrams of laws of supply and demand. According to these graphs, we can put forth 3 conditions.

More Supply, Less Demand: This kind of situation is known as a surplus. Prices of goods in such a situation are low, owing to the less demand and more supply. Thus, more the supply, lesser is the cost. More Demand, Less Supply: This condition is known as deficit of supply. In such a situation, there is more demand and less supply which leads to a rise in the price level. The lesser the supply, the more is the price and more the demand, higher is the price. Equilibrium: This is the ideal stage in any market. The equilibrium is an equal amount of supply and demand. In such a situation, the price is not very less and also not very large. It is precise. Such situation is desirable in any market as it ensures a great level of price stability.

In the above diagrams, the intersection of the two curves decides the price of commodities. Movement by any of the curves raises or decreases the price of the commodity. For example, if the demand curve shifts in an upward direction, then prices are bound to rise and if it moves in a downward direction, prices tend to fall. On the other hand, if the supply curve indicates a fall, then prices are bound to rise drastically. It basically works like a balance, where one fall leads to an opposing rise.

Productive and Allocative Efficiency

Through these means, society strives to achieve both productive efficiency and allocative efficiency. An example of productive inefficiency is when a method of production yields the same as another that uses less of any resource but does not use more of any other resource. Hence, there would be no reason to use the less productive method. An example of allocative inefficiency is when a method of production using more of a certain resource and less of another than another method costs more to society overall. Even if it is productively efficient, the resources are not used in the best distribution--the allocation is inefficient. In this situation, the inefficient method should be swapped for the more efficient method by a redistribution of which combination of resources is used for a certain mode of production. Another interpretation of allocative inefficiency is the distribution of goods to members of society in a way that yields less than optimal happiness. This interpretation is almost never achieved but is nevertheless the goal toward which economists strive. Productive efficiency must be satisfied before allocative efficiency may be.

Allocative Efficiency
Definition: Allocative efficiency occurs when there is an optimal distribution of goods and services. This involves taking into account consumer's preferences. A more precise definition of allocative efficiency is at an output level where the price equals the Marginal Cost (MC) of production. This is because the price that consumer's are willing to pay is equivalent to the marginal utility that they get. Therefore the optimal distribution is achieved when the marginal utility of the good equals the marginal cost. Firms in Perfect competition are said to produce at an allocatively efficient level Monopolies can increase price above the marginal cost of production and are Allocatively inefficient.

Monopoly sets a price of Pm. This is allocatively inefficient because Price is greater than MC. Alloactive efficiency would occur at the point where the MC cuts the Demand curve so Price = MC. Note: Producing on the production possibility frontier is not necessarily allocatively efficient because a PPF is not concerned with distribution. This requires the addition of indifference curves

http://www.economicshelp.org/dictionary/a/allocative-efficiency.html
*Allocative (sometimes called Pareto efficiency) efficiency occurs when firms produce where Price equals Marginal Cost. This occurs in perfectly competitive markets. With Pareto efficiency you cannot make someone better off without making someone else worse off.

*Productive efficiency occurs when firms produce on the lowest point of the average cost curve. In other words when all economies of scale have been exploited and any further increase in output will mean diseconomies of scale. This again occurs in perfectly competitive markets. Both types of efficiency occur on the boundary of the PPF.

Examples of allocative and productive efficiency?

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Allocative efficiency has to do with resource allocation. It is said to occur when the value that consumers place on a product is the cost of the product: P=MC. Productive efficiency occurs when the product is produced at the lowest possible cost, that is at minimum AC. As you can see, only in perfect competition do you have both allocative and productive efficiency: P=MR=MR=Min(AC).

economic efficiency
Efficiency is one of the most important concepts to use in you're A Level Economics course. There are several meanings of the term - but they generally relate to how well an economy allocates scarce resources to meets the needs and wants of consumers. Make sure you know your definitions well, can illustrate them using appropriate diagrams and can apply them to particular situations Static Efficiency Static efficiency exists at a point in time and focuses on how much output can be produced now from a given stock of resources and whether producers are charging a price to consumers that fairly reflects the cost of the factors of production used to produce a good or a service. There are two main types of static efficiency Allocative Efficiency Allocative efficiency is achieved when the value consumers place on a good or service (reflected in the price they are willing to pay) equals the cost of the resources used up in production. Condition required is that price = marginal cost. When this condition is satisfied, total economic welfare is maximised.

Pareto defined allocative efficiency as a situation where no one could be made better off without making someone else at least as worth off. Under monopoly, a business can keep price above marginal cost and increase total revenue and profits as a result. Assuming that a monopolist and a competitive firm have the same costs, the welfare loss under monopoly is shown by a deadweight loss of consumer surplus compared to the competitive price and output. This is shown in the diagram below.

This can be illustrated using a production possibility frontier - all points that lie on the PPF can be said to be allocatively efficiency because we cannot produce more of one product without affecting the amount of all other products available. Point A is allocatively efficient - but at B we can increase production of both goods by making fuller use of existing resources or increasing the efficiency of production.

Productive Efficiency Productive efficiency refers to a firm's costs of production and can be applied both to the short and long run. It is achieved when the output is produced at minimum average total cost (AC). For example we might consider whether a business is producing close to the low point of its long run average total cost curve. When this happens the firm is exploiting most of the available economies of scale. Productive efficiency exists when producers minimise the wastage of resources in their production processes. Trade-offs between efficiency and equity There is often a trade-off between economic efficiency and equity. Efficiency means that all goods or services are allocated to someone (theres none left over). When a market equilibrium is efficient, there is no way to reallocate the good or service without hurting someone. Equity concerns thedistribution of resources and is inevitably linked with concepts of fairness and social justice. A market may have achieved maximum efficiency but we may be concerned that the "benefits" from market activity are unfairly shared out. Social Efficiency The socially efficient level of output and or consumption occurs when social marginal benefit = social marginal cost. At this point we maximise social economic welfare. The presence of externalities means that the private optimum level of consumption / production often differs from the social optimum.

In the diagram above the social optimum level of output occurs where social marginal cost = social marginal benefit (point B). A private producer not taking into account the negative production externalities might choose to maximise their own profits at point A (where private marginal cost = private marginal benefit). This divergence between private and social costs of production can lead to market failure.

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Sample: Competition Leads To a More Efficient Use Of Resources

Competition leads to a more efficient use of resources. Discuss. The word efficiency, in economists dictionary, is often interpreted into the degree of an economy allocates scarce resources to meet the needs and wants of consumers. As we can see that a free market economy is the one in which resources are allocated based on the principle of self-interests. Where there are profits, there are firms, and where there are firms to produce identical goods and services, inevitably, there is competition. The degree of competition determines the market structure which is the main determinant of the behaviour or conduct of firms. This in turn determines the efficiency in the use of scarce resources. It is often argued that competition leads to a more efficient use of resources. I agree with the statement, but not totally. In my opinion, competition would lead to efficiency and best use of resource by encouraging firms to improve productivity, to reduce price and to innovate, but in certain industries, particularly industries where the impact of economies of scale is distinctive, for example industries with great indivisibilities, monopoly is more favourable. Economic efficiency can be seen to maximizing total utility from a given amount of scarce resources. There are

two types of economic efficiencyallocative efficiency and productive efficiency. According to their definitions, the idea of allocative efficiency is that consumers pay firms exactly what the marginal cost is (Price=Marginal cost)such a pricing strategy can be shown to be a key condition if achieving a Pareto optimum resource allocation, where it is no longer possible to make anyone better-off without making someone else worse-off. (Griffiths and Wall, p93) When this condition is satisfied, total consumer and producers surplus are maximized. Alternatively, productive efficiency is about how to produce a good or service. To achieve productive efficiency, a firm must use all available methods...