Economics can be defined as the study of consumption and production of goods and services. There are factors of production such as labor, labor and capital that are needed for any economic system to function. Choices are made due to limited amount of resources. Economic efficiency is a based on making optimal use of scarce resources in order to maximize benefits. In the market system, there are many ways to determine efficiency. Two economic concepts regarding efficiency are allocative and productive efficiency.
Allocative efficiency is based on whether goods and services produced matches changing needs and preferences that we place with the greatest value. Allocative efficiency can be achieved when no one is better off without making someone worse off; this is also known as pareto efficiency. Allocative efficiency is the point of the productive frontier where you cannot produce one more good without giving up another. In achieving allocative efficiency marginal cost is equals to price. On the other hand, productive efficiency can be defined as a concept of producing goods and services at the lowest cost. This is the outcome achieved at all points on the productive possibility frontier. In this case, only one more product can be produced at the expense of producing less of another product. Product efficiency requires firms to use the best technology in order to push the productive possibility frontier outward and for business to produce more output.