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In the single-price model, at the point of allocative efficiency price is equal to marginal cost. [3] [4] At this point the social surplus is maximized with no deadweight loss (the latter being the value society puts on that level of output produced minus the value of resources used to achieve that level). Allocative efficiency is the main tool ...
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. Productive efficiency occurs when units of goods are being supplied at the lowest possible average total cost.
That is, as an economy specializes more and more into one product (such as moving from point B to point D), the opportunity cost of producing that product increases, because we are using more and more resources that are less efficient in producing it. With increasing production of butter, workers from the gun industry will move to it.
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).
A price signal is information conveyed to consumers and producers, via the prices offered or requested for, and the amount requested or offered of a product or service, which provides a signal to increase or decrease quantity supplied or quantity demanded.
The loss in both surplus' are deemed allocatively inefficient and not socially optimal. In contrast, when the firm has more information and discrimination is present, monopoly pricing becomes increasingly efficient as it approaches perfect discrimination through the various forms of price discrimination: Quantity Discount; Market Segregation
Average-cost pricing does also have some disadvantages. By setting price equal to the intersection of the demand curve and the average total cost curve, the firm's output is allocatively inefficient as the price is less than the marginal cost (which is the output quantity for a perfectly competitive and allocatively efficient market).
An example PPF: points B, C and D are all productively efficient, but an economy at A would not be, because D involves more production of both goods. Point X cannot be achieved. Productive efficiency occurs under competitive equilibrium at the minimum of average total cost for each good, such as the one shown here.