Explain the difference between productive and allocative ( economic ) efficiency.
- Explanation of productive efficiency, e.g. output at AC minimum
- Define to the effect that this shows that all factors (fixed and variable) are being utilised to the utmost efficiency when average costs are at the lowest point
- Definition of allocative efficiency, e.g. P = MC
- Explanation that allocative efficiency means that welfare is maximised - the firm is producing the last possible unit since the market price means that there is a demand for it at that price
- illustrating both concepts using a unit cost picture (PCM)