What is economic efficiency and what are some examples of it?

Economic efficiency is a state where every resource is allocated optimally so that each person is served in the best possible way and inefficiency and waste are minimized. While this is a general definition, lets look at some other factors often used to describe this term.
1. Production of goods is at its lowest cost.
2. One person cannot be helped, by means of reallocating the goods, without making another person worse off.
3. It indicates that there has been a balance between loss and benefit.
So, let's take a look at an example to help us explain economic efficiency. Suppose a clothing factory has several machines to help sew the clothing. The machines can produce enough clothing that when sold could result in $100, $75, and $50. In this example, the most efficient option is the one that results in $100. Anything less than $100 is considered an inefficient use of the machines.
While this may seem pretty clear cut, this scenario does not take variables into consideration. One obvious example, would be the amount of labor needed to operate the machines in order to produce $100. While $100 signifies maximum output, it also might signify more employees to operate those machines. More employees means paying more money in wages, which then affects profit.
This is where consideration needs to be made about the balance of loss and benefit. Obviously, it would benefit the company to produce the maximum number of products, but how much loss, in the amount of more wages paid out, does the company really want to endure? Where do production output and labor paid balance?
Also, it is important to point out that while the owner of the company may be happy having the machines operating at maximum output, in doing so, he is taking employees away from their families. This would illustrate that taking a resource away from one individual (time) helps make another better off (the company owner having machines working at maximum output).

Follow Us Email