Economic efficiency concepts Term Paper Example | Topics and Well Written Essays - 1500 words

Economic efficiency concepts - Term Paper Example profit." This is basically a study of factors which affect economic decisions of individuals, households and business enterprises in specifically defined markets. In view of these, a relevant topic encompassing economics at the abovementioned level is the concept of economic efficiency. Economic efficiency is normally defined as â€Å"a ratio of the quantity of some measure of output to the quantity of input required to bring it about. In economic theory, the desired output of economic activity is taken to be an increase in social utility, and the input required is some combination of the productive resources of land, labour and capital.† (The Citizens Compendium 2009) Productive efficiency is â€Å"the optimum combination of resources required to produce a given output at a given state of technology at which the ratio of their marginal products to their marginal costs are equal, because otherwise output could be increased at a given level of cost by increasing one input and reducing another.† (ibid. par. 5) On the other hand, allocative efficiency means that â€Å"resources are allocated optimally between two outputs when the ratios of their marginal social utilities to their marginal social costs are equal - because social utility could otherwise be increased by switching resources from one output to the other†. (ibid. par. 6) Finally, distribution efficiency is achieved when â€Å"each consumers margin rate of substitution of one product for the other is the same as that of the other consumer; that is to say when the ratio of the marginal utilities of the two products is the same for the two consumers, because otherwise they could gain from a swap† (ibid. par 7). According to Schneck (2007), â€Å"the criterion for economic efficiency is value. A change that increases value is an efficient change and any change that decreases value is an inefficient change.† He further averred that value is subjective; meaning, it differs depending on the perception of the