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Economic Efficiency: Definition & Examples

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  • 0:00 What Is Economic Efficiency?
  • 1:06 Example
  • 2:34 A Deeper Look
  • 3:29 Another Example
  • 4:02 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we will learn what economic efficiency means. We will then look at some factors that help define this type of economy. Lastly, we will use some examples to better understand economic efficiency.

What Is Economic Efficiency?

Imagine a group of children playing together. In this group, there are five children. In the small room where they are playing, there are exactly five toys. This means that each child gets one toy. This also means that there is an equal amount of toys and children. If you take away one toy and give it to another child, everything is no longer equal. In doing this, one child benefited at the expense of another child. Therefore, there is no longer a state of economic efficiency.

So what exactly is meant by the term economic efficiency? Well, 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.

Example

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).

A Deeper Look

Now that we know what the definition is for economic efficiency as well as a few factors that are often used to describe this term, let's look a little deeper into the meaning. We have already stated that economic efficiency is a state where every resource is allocated optimally so that each person is served in the best possible way, and waste and inefficiency are minimized. But what does that mean, exactly?

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