Describe Ottos firm in terms of the following Productive eff

Describe Otto’s firm in terms of the following Productive efficiency Allocative efficiency With side-by-side graphs, show the results of an increase in demand for oranges and identify what happens to the following in the short run. Price for Otto’s firm Quantity for Otto’s firm

Solution

Productive efficiency can be defined as producing goods and services for the lowest cost. Productive efficiency is said to occur on the production possibility frontier. On the PPF curve, it is impossible to produce more of one good without producing less of another.

Lowest Point on SRAC Curve

Productive efficiency also involves producing at the lowest point of the short run average cost curve (where MC cuts the bottom of the SRAC curve.)

Allocative Efficiency

Allocative efficiency is quite different this is more concerned with the distribution and allocation of resources in society.

For example, there is no point in being productively efficient if all resources are diverted to making guns. We could be producing on a production possibility frontier but, if it is all guns, society may not have enough food and health care. An anecdote from the Soviet Union under Communist days tells how factories were given targets to produce certain quantities of goods. They often did this with great vigour and were productively efficient, but, often they were producing goods which weren’t needed by society. There is a story that one factory made left hand boots that nobody wanted, so at the end of the day they would efficiently burn them and the next day start again! But, people didn’t mind too much as they had a job.

Allocative efficiency looks at the marginal benefit of consumption compared to marginal cost. Allocative efficiency will occur when marginal benefit = marginal cost.

We can assume price = marginal benefit. So we also say Allocative efficiency occurs where price = Marginal cost.

A rise in demand for oranges would shift the demand curve rightwards , thus leading to a rise in equilibrium level of orange price and orange quantity.Graph for the same: