Question

A. Why does producing where P = MC indicate allocative efficiency?

B. Why does producing at the minimum of ATC indicate productive efficiency?

Answer 1

1 - Allocative efficiency means that the goods and services are distributed in society in such a manner is to ensure optimal distribution with maximum effiiciency. Price represents the measure of worth of good for society and MC represents producer. If Price will not be equal to MC , there will be scope of Expansion or contraction in the supply by the producer till P= MC is reached. Thus P = MC , shows the allocative efficiency.

2 - If the production is being done at the level of minimum ATC , this means that the economies of scale are exhausated fully now , and after this diseconomies will start. It is the point where the production is most cost effective , and the profit can be maximum with cost at lower level. Hence this point is called the point of prodictive efficiency.