4.1.5 Productive and allocative efficiency


    Productivity – output per unit of input (worker) per time period.


    • A firm is productively efficient when it is operating at the lowest point on its average costs curve
    • Operating at minimum costs means no wastage e.g. no defective products
    • Productivity is maximised
    • You will benefit from economies of scale e.g. bulk-buying and mass-production


    Productivity is a measure of efficiency i.e. if productivity increases, more items are produced in the same time with the same amount of resources (so reducing average costs)


    Labour productivity is used in factories, through set targets given to workers which can be linked to pay to give workers incentive to work more efficiently



    Allocative efficiency – production of goods that match customer preferences and maximise                                satisfaction (utility)



    • Many small changes are made by businesses e.g. what filling to have in a sandwich.
    • These decisions may be just a small margin (cost or revenue) above the opportunity costs (nest best alternative)
    • Alternatives may be similar but if marginal benefit is higher than marginal cost then it is worth.


    Trade-off – a sacrifice that must be made to get a certain product or experience. A business               must give up one thing to provide another.


    Marginal utility – the extra satisfaction from consuming one extra unit of the good.


    The demand curve slopes downwards because of diminishing marginal utility, suggesting that each extra unit generates less utility than the one before therefore customers are willing to pay less.


    Ways in which productivity can be increased

    1. Technology: machines/better technology will make work quicker e.g. automated production line.
    2. Human Capital (workers): skilled and trained produce more than in the same time than less skilled workers.
    3. Quality of Managers: Will improve performance of employees and reduce staff turnover if they are good.


    Market orientation

    A business can be either product oriented or customer (market) oriented:

    Customer oriented: focus on discovering and meeting the needs and desires of its customers through market research and then developing products to meet these. This means the product is less likely to fail and products will improve over time and become more innovative. However, the research may be expensive and competitors will be quicker to the market and gain first mover advantage.

    Product oriented: there is a focus on innovation and there is high skill in manufacturing and higher productive efficiency. On the other hand, products may not be wanted by customers and may not sell well due to a lack of information.


    How do markets interact with each other?


    Intermediate goods (components) are often brought offshore or from specialist suppliers. Competition in intermediate markets focus on price and specification as product features are usually identical/very similar. Innovation in components and parts improves the quality of the product but other intermediate firms will fight for survival.


    In service sector businesses, if one firm is unable to handle a certain contract they may turn to competitors for help, with the agreement that in the future they will do the same. This mutually ensures work will be fairer. Similarly building firms may work in conjunction with architects to ensure a steady flow of work for both parties and ease for consumers as an added benefit.


    Please enter your comment!
    Please enter your name here