What is allocative efficiency?



Allocative efficiency is when a business produces the optimal amount of a product. This is when the marginal cost is equal to the price that it is sold for. Essentially it is the equilibrium price, which is seen where the demand curve and the supply curve intersect.

When something is allocatively efficient, the firm receives the maximum net benefit from the sale. If one were to achieve allocative efficiency, they would have made a perfect market. Producing what consumers want in the perfect amount would make for a happy consumer and producer. At this point it becomes impossible to increase the well-being of one individual without hurting the well-being of another.

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The point of allocative efficiency is the equilibrium point



This video shows a scene in which there is no allocative efficiency. The producer supplied far too many hot dogs, for they did not know excacly how many hot dogs the competitors would eat.
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Question to test knowledge of allocative efficiency



If Marginal cost is equal to price P1, at which point on the graph is there allocative efficiency?

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Answer: point (Q1, P1)