Analyzing Productive & Allocative Efficiency: Economics for Business

This essay provides an analysis of productive and allocative efficiency, contrasting competitive firms with monopolies, and examining the impact of inflation in Pakistan. It defines productive efficiency as the optimal combination of inputs at the lowest cost, achieved in the long run through free entry and exit of firms, ultimately leading to normal profit. Allocative efficiency is defined as the socially preferred production point, where the firm's price equals marginal cost, aligning social benefits with social costs. The essay highlights that competitive firms achieve both productive and allocative efficiency in the long run. In contrast, monopoly firms, as price makers, maximize profit where marginal revenue equals marginal cost, resulting in higher prices, lower quantities, and deadweight loss compared to competitive markets. Finally, the essay briefly discusses the effect of a fall in export demand on aggregate demand, aggregate supply, inflation, and unemployment, noting that a reduction in export earnings leads to a leftward shift of the aggregate demand curve, causing declines in both real output and price levels. Desklib offers a wide array of solved assignments and past papers to aid students in their studies.

Economics for Business
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Productive and Allocative Efficiency Productive efficiency
 associated with optimal input combination and the lowest cost
 productive efficiency in the long- run
 free entry and exit of firms
 supernormal profit and entry of new firms.
 economic loss and then firms exit.
 adjustment continues and firms earn only normal profit
 productive efficiency is reached

Figure 1: Productive efficiency for competitive firm

 Allocative efficiency
 socially preferred production point
 For competitive industry firm’s price equals marginal cost
 profit maximizing condition
 Marginal revenue= price= marginal cost
 social benefits matches with social cost
 allocative efficiency is achieved

Figure 2: Allocative efficiency of competitive firm
Both productive and allocative efficiency achieved in the long run (Decker et al.,2017).

Comparison between Monopoly and Competitive industry Competitive firm is a price taker
 profit-maximizing points
 price equals marginal cost
 Monopoly firm is price maker
 profit maximization
 Marginal revenue= marginal cost
 Monopolist price >competitive price
 Monopoly quantity< competitive quantity
 Dead weight loss.

Figure 3: Price and Output for monopoly and competitive firm

Inflation in Pakistan
Figure 4: Inflation in Pakistan

Effect of fall in export demand on aggregate demnad,
aggregate supply, inflation and unemployment
 Aggregate demand
 AD = C + I +G + (X-M)
 A fall in export demand
 reduction in export earnings
 aggregate demand falls
 leftward shift of AD
 both real output and price declines

Figure 5: effect of a fall in net export demand

References
 Decker, R., Haltiwanger, J., Jarmin, R. S., & Miranda, J. (2017). Declining Dynamism, Allocative Efficiency, and the
Productivity Slowdown.
 Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago press.

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