- No one can be made better off without making someone else worse off;
- More output cannot be obtained without increasing the amount of inputs; and
- Production proceeds at the lowest possible per-unit cost
There are different types of efficiency
1. Productive Efficiency.
This occurs when the maximum number of goods and services are produced with a given amount of inputs. This will occur on the production possibility frontier. On the curve it is impossible to produce more goods without producing less services. Productive efficiency will also occur at the lowest point on the firms average costs curve
2. Allocative efficiency
This occurs when goods and services are distributed according to consumer preferences. An economy could be productively efficient but produce goods people don’t need this would be allocative inefficient.A2: Allocative efficiency occurs when the price of the good = the MC of production
3. X -Inefficiency
This occurs when firms do not have incentives to cut costs, for example a monopoly which makes supernormal profits may have little incentive to get rid of surplus labour. Therefore a firms average cost may be higher than necessary
4. Efficiencies of Scale
This occurs when the firms produces on the lowest point of its Long run average cost and therefore benefits fully from economies of scale
5. Dynamic Efficiency
This refers to efficiency over time for example a Ford factory in 1920 would be very efficient for the time period but would now be inefficient by comparison therefore it is necessary for firms to constantly introduce new technology and reduce costs over time
6. Social Efficiency
This occurs when externalities are taken into consideration and the social cost of production (SMC) = the social benefit (SMB)
7. Technical Efficiency
Optimum combination of factor inputs to produce a good: related to productive efficiency.
In conclusion, an economic system is more efficient if it can provide more goods and services for society without using more resources. Market economies are generally believed to be more efficient than other known alternatives. The first fundamental welfare theorem provides some basis for this belief, as it states that any perfectly competitive market equilibrium is efficient (but only if no market imperfections exist).