Theme 4 - Productive and allocative efficiency

  • Created by: becky.65
  • Created on: 14-01-18 18:57
What is productive efficiency?
Minimising production costs by using the least possible quantity of real resources. This keeps prices to a minimum and helps to achieve the best possible standard of living
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What is allocative efficiency?
Using resources in such a way that actual output is perfectly matched to consumer preferences. It involves responding to changes in consumer demand as quickly as possible
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In theory, what should the free market system satisfy?
Both productive and allocative efficiency as the forces of supply and demand encourage businesses to provide what people want and discontinue products that no longer sell
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Why do businesses create productive efficiency?
Research and innovation cut costs, reduce the labour required, cut prices and make products more attractive
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How can market imperfections distort productive and allocative efficiency?
Market power can shift from producing what we want to persuading us to buy something different, it can push up prices by limiting output and find ways to avoid strong competition
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What does allocative efficiency depend on businesses making changes at?
The margin because if sales are decreasing then production must be cut
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What does profit lead to businesses doing with production?
Making it economical and appropriate to needs and wants
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What is an opportunity cost of productive and allocative efficiency?
Change can be costly and risky if businesses can continue on as they are
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Why is rising productivity vital to growing the economy?
It cuts unit labour costs and can increase pay
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What are three ways to achieve greater productivity?
Technology, human capital and the quality of management
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How can technology achieve greater productivity?
Process innovation increases labour productivity, as do new technologies as capital intensive production raises labour productivity
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How can human capital achieve greater productivity?
The higher the level of skills, training and education, the more productive a human being will be as they have more transferable skills so they can be moved easily
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How can the quality of management achieve greater productivity?
The way people are organised makes a big difference to output and the ethos of a business or good working conditions can increase productivity. Good pay can also increase this
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How can oligopolies benefit productivity?
They spend vast sums on research, product development and new ways of producing cheaply and efficiently at affordable prices once economies of scale are achieved
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How can businesses make sure they produce what the consumer wants?
Market research and market orientation
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What is market orientation?
Businesses studying consumer preferences and keeping in close touch with their markets
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How can supply chains increase productivity?
Outsourcing and offshoring can perform specific functions more cheaply and if suppliers cut their costs this helps businesses compete
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How do service sector businesses play part of a supply chain?
If one cannot handle all the business coming in they can turn to a competitor to help or turn to someone with expertise they do not have
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What happens with a consortium?
For big projects, companies will work together
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Other cards in this set

Card 2

Front

What is allocative efficiency?

Back

Using resources in such a way that actual output is perfectly matched to consumer preferences. It involves responding to changes in consumer demand as quickly as possible

Card 3

Front

In theory, what should the free market system satisfy?

Back

Preview of the front of card 3

Card 4

Front

Why do businesses create productive efficiency?

Back

Preview of the front of card 4

Card 5

Front

How can market imperfections distort productive and allocative efficiency?

Back

Preview of the front of card 5
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