Cambridge International as and a level Economics Ebook

economic effi
ciency
stems from 
this fundamental economic problem. Economic effi
ciency 
is said to exist when it could be judged that all of our 
scarce resources are being used in the ‘best’ possible way. 
Th
is means that the greatest possible level of infi nite wants 
is being met with those scarce resources. In agriculture, 
for example, it is where maximum crop yields result from 
farming a given area of land, or in manufacturing, where 
as much output as possible is produced from a given set of 
inputs. Economic effi
ciency is a very important concept 
in Economics. It is something that is always judged 
to be desirable. It represents the best possible solution 
to the economic problem. As you will see, it pervades 
many of the topics that follow, both microeconomic and 
macroeconomic.
Economic eff iciency:
 
where scarce resources are used in 
the most eff icient way to produce maximum output.
KEY TERM
Economic effi
ciency consists of:
■
Productive eff iciency: 
This occurs when firms produce 
at the lowest possible cost. A firm is productively eff icient 
when it is making the best use of resources and producing 
at the lowest cost possible. For example, it can apply 
where a car assembly plant is using the most up-to-
date technology, minimising the cost of producing each 
vehicle. 
■
Allocative eff iciency: 
This occurs when firms produce 
the combination of goods and services that are most 
wanted by consumers. The implication is that there 
is no waste and both producers and consumers are 
satisfied with what is produced. The price that they 
are willing to pay reflects their preferences and the 
benefits they derive from consumption. It represents 
Productive eff iciency: