The conditions required for productive efficiency (minimising average total costs) and allocative efficiency (price = marginal cost)
Productive efficiency means a firm produces at its lowest possible cost per unit. Allocative efficiency means the price consumers pay exactly equals the extra cost of making one more unit.
Formula
Productive efficiency: output at min ATC; Allocative efficiency: P = MC
Real World
In the UK wheat market, commodity prices force farmers to sell at world market price, which closely equals marginal cost — pushing towards allocative efficiency involuntarily.
Exam Focus
Always state the condition precisely (P = MC or output at min ATC) — describing it vaguely as 'low cost' will not gain the mark.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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