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There are 2 types of static efficiency; productive efficiency and allocative efficiency. Productive efficiency occurs when production is at an output level where there is the least cost. Allocative efficiency is concerned about whether resources are used to make good and services that consumers want to purchase.

Static efficiency refers to efficiency at a given point in time whereas dynamic efficiency is related to the efficiency of resources used over a period of time.

Productive Efficiency

This occurs at the point of production where the average cost is at its lowest. This is the lowest point on the AC curve (at the MES point) and is the point where the MC curve intersects the AC curve. Therefore productive efficiency can be achieved if AC=MC. For an aggregate economy there is productive efficiency if it is operating on its PPF curve. 

Allocative Efficiency

Allocative (economic) efficiency is a measure of whether resources are allocated to producing the goods and services as demanded by the consumers. Allocative efficiency is achieved if P=MC. If in all industries every firm was operating allocatively efficiently then it would be impossible to make anyone better off without incurring a loss for someone else. Therefore the allocation of resources is then said to be Pareto Efficient, if the allocation of resources is Pareto inefficient then it is possible to make people better off without making anybody worse off.


X-Inefficiency occurs if the firm operates above minimum costs. This can be seen on a graph as the firm producing at any point above the AC curve (it is impossible to operate below the curve as this region is unattainable). The AC curve shows the most efficient cost position at any given output. If the firm is operating above this (at X-Inefficiency) then it isn’t working efficiently; this may be due to organisational slack.

Page last updated on 20/10/13