Answer to Question #205685 in Microeconomics for vtg

Question

Productive efficiency is concerned with producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost. •

Discuss the two main components of productive efficiency. •

Compare and contrast the methods used by the society in making their economic decisions. 

Answer 1

Solution:

The two main components of productive efficiency are:

1.). Technical or physical component – This refers to the ability to utilize the inputs of production effectively by producing as much output as input usage permits, or by utilizing as little input as output production allows. A business is technically efficient when it combines the optimal combination of labor and capital to produce a product, that is, it cannot produce more of a particular product without more inputs.

 

2.). Allocative component – This refers to the ability to combine input and outputs in optimal proportions in consideration of prevailing prices. It is concerned with the optimal distribution of resources, that is whether resources are utilized to produce the products and services that consumers want to purchase.

 

The methods used by the society in making their economic decisions include the following:

1.). Market demand and prices – Society will be guided by the market demand and prices in order to decide on what quantities to consume. When certain products or services have high demand or have low prices, society will tend to purchase them more and vice versa.

 

2.). Cost-benefit analysis – This is a method that is used to measure the benefits of a decision or taking minus the costs associated with taking that action. Society can use this method to analyze which decisions to make and which to forgo.

 

3.). Opportunity cost analysis – This represents the potential benefits society misses out on when selecting one option over another. This method is used to determine the best alternative possible for society, which will provide more benefits.