Efficiency Principle (Economics) - Explained
What is the Efficiency Principle?
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What is the Efficiency Principle?
The efficiency principle is an economic theory that relates the efficiency of an action to the uniformity between the marginal benefits and the marginal social cost of allocated resources. This theory states that an action has the greatest social benefit when the marginal benefit of resources is equivalent to the marginal costs. Hence, an action would only benefit society maximally when available resources are allocated effectively. Most decisions that organizations make in relation to the allocation of resources draw insight from the efficiency principle. Organizations also apply this theory in reducing the rate of excess burden and loss that emanate from allocative inefficiency.
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How does the Efficiency Principle Work?
There are certain factors and economic principles that are central to the efficient principle. It rests on the fact that the production of goods and services offer the greatest benefit to the consumers or the society when the last unit produced creates a marginal benefit that is equivalent to the marginal cost of production. Also, in the case of a consumer, decisions to purchase additional products are weighed in relation to the benefits the product can offer. For example, if two similar products have different prices, a consumer would prefer to buy the cheaper product if their benefits are the same or buy a product that offers more benefits at a higher price. According to the efficiency principle, all rational decisions made by customers are for the benefit of the society.
Example of Efficiency Principle
If a company that is into the sales of chocolates and cocktails stands as an economy, if a cocktail drink goes for $5 and a box of chocolates is sold for $3, under the efficiency principle, the sales of these goods have maximum benefit to society only when the marginal benefits resulting from allocative efficiency is the same as the marginal cost of production. For instance, if producing 10 cocktails and 15 boxes of cookies cost $95, the output of this business must be combined having the efficiency principle in kind, that is, it must meet demand at the lowest possible cost and also the greatest possible benefit in the society.
- Total Utility (Economics)
- Efficiency Principle
- Indifference Curve
- Time Preference Theory of Interest
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
- Normative Economics
- Positive Economics
- Invisible Hand
- Sunk cost