Allocative Efficiency, Productive Efficiency, and Equality - Video Tutorials & Practice Problems

Efficiency and Productive Efficiency

now we'll discuss the ideas of efficiency and equality and how they relate to micro economics. 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 gonna take this example to uh so you can understand productive efficiency. Let's take it to this graph. Um And I'm gonna introduce a graph that we're gonna deal with a lot more later, but I'm just gonna kind of deal with it on a high level no math here, just kind of uh discuss this concept of efficiency. Okay, and here we're gonna see the economy very similar uh to, you know what? You might find that 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 can produce this much light beer and no pizza. Um 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 um 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 like beer, right? Um And I wanna 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 gonna call this point and I'm gonna go back to red, we're gonna 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 gonna 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 efficiency, oops, 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 its productively efficient and the idea of it being attainable or unattainable. So the idea anything inside this curve. So anything I'm gonna highlight here in yellow, this is all attainable to us, right? These are all production um 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 line. That's just further than um that's just more than our resources will allow. Okay, 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 gonna 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, allocated efficiency and this is that 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, um You can't be expected to just know what the consumers want. This is kind of information, it's going to be given to you on the test, and then you'll have to find the point of allocated efficiency or something like that. So, as an example here on our graph, um let's talk about a couple of different schools and their allocated efficiency point, right? Maybe you're at a school like fs you big party school, right? Loves their cheap beer, right? And they might find that their most allocated 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's not to worry. They don't need sustenance, they can get by just on the beer here. So let's put something like lots of beer, No pizza. So they're allocated efficiency. Point would be somewhere around point a right there. Still productively efficient, but they're just making the right stuff for their consumers. What if you're out of school at like N. Y. U. Where they have really good pizza? Where will I put deep dish pizza? So this should really be some kind of Chicago school. So let's say you're at University of Illinois in Chicago, right? And um 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 you're productive. Your, excuse me? Your allocated 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, um, reach allocated efficiency here. Sorry, let me get out of the way there. Um, Both of these points do reach allocated efficiency. It's just a matter of the consumer preference, right? What do the consumers want? And that's what we're gonna produce. So why don't we move on to the next video?

Equality

So, let's move on to the next topic here. Uh, the idea of equality, Right, So, we've been talking about efficiency to this point, right? How do we make the right stuff? How do we make as much as possible? But this is more about the distribution of these, this production, Right? Equality is talking about the fair distribution of the economic benefits. Right? So the idea of getting my fair share. Um and in this course, we're definitely going to be spending a lot more time on efficiency than equality, but it is gonna come up when we're dealing with, you know, policy making, um, and, you know, government intervention in the market, things like that. But let's look at our example, you know, equity a lot of times it has to do with ethics to, you know, maybe is it even ethical, you know, to produce at 0.8? You know, these people that only have beer, you're in no sustenance. Yes, I know the Seminoles can get by in that lifestyle, but is it ethical? Right. These kinds of questions that that's what we're dealing with when we're talking about equality. Not really, um, as key to this course, but you'll see that it is important to economics to make sure that the distribution of the, of of resources is also happening in an equitable way. Cool. So let's move on.