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Allocative efficiency is a state of the economy in which production is aligned with the preferences of consumers and producers; in particular, the set of outputs is chosen so as to maximize the social welfare of society. [1] This is achieved if every produced good or service has a marginal benefit equal to the marginal cost of production.
When drawing diagrams for businesses, allocative efficiency is satisfied if output is produced at the point where marginal cost is equal to average revenue. This is the case for the long-run equilibrium of perfect competition .
Data envelopment analysis (DEA) is a nonparametric method in operations research and economics for the estimation of production frontiers. [1] DEA has been applied in a large range of fields including international banking, economic sustainability, police department operations, and logistical applications [2] [3] [4] Additionally, DEA has been used to assess the performance of natural language ...
By doing so, it defines productive efficiency in the context of that production set: a point on the frontier indicates efficient use of the available inputs (such as points B, D and C in the graph), a point beneath the curve (such as A) indicates inefficiency, and a point beyond the curve (such as X) indicates impossibility.
Inefficiency is the absence of efficiency. Kinds of inefficiency include: Kinds of inefficiency include: Allocative inefficiency refers to a situation in which the distribution of resources between alternatives does not fit with consumer taste (perceptions of costs and benefits).
The production function is one of the key concepts of mainstream neoclassical theories, used to define marginal product and to distinguish allocative efficiency, a key focus of economics. One important purpose of the production function is to address allocative efficiency in the use of factor inputs in production and the resulting distribution ...
It involves only risk-free transactions and the information used for trading is obtained at no cost. Therefore, the profit opportunities are not fully exploited, and it can be said that arbitrage is a result of market inefficiency. This reflects the semi-strong efficiency model. 2. Fundamental valuation efficiency
Perfect competition provides both allocative efficiency and productive efficiency: Such markets are allocatively efficient, as output will always occur where marginal cost is equal to average revenue i.e. price (MC = AR). In perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost (P = MC).