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In a market economy, why does a firm have a strong incentive to be productively efficient and allocatively efficient? What does the firm earn if it is productively and allocatively efficient, and what happens if it is not?
There are two types of efficiency. A firm can be productively efficient, which means that the firm is on the edge of its production possibility frontier and it cannot produce more of one good without decreasing the production of another good. Alternatively, a firm can be allocatively efficient, which means that the firm produces goods such that marginal revenue equals marginal cost. If both of these conditions are met, then the firm maximizes profit because it is utilizing all of its resources in a way that maximizes profit (total revenue minus total cost). So, firms have a strong incentive to be both productively efficient as well as allocatively efficient. If a firm achieves both of these, it maximizes profit. If it does not, then it earns a profit lower than it could be earning if it increased efficiency.
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Let's talk about why a firm I want to be a locket, vividly efficient and productively efficient just to remind you a locket ifly efficient means producing goods and service is that consumers ask for and productively efficient means producing these goods at the lowest possible cost. Well, the reason to do either one or both ISS profits. And that's the straightforward answer. Right, Firms one profits If you're not allocated the efficient meaning you're making goods that people are not asking for than you are not going to sell them. You're not gonna make profits, and eventually you're going to leave the business. If you're not productively efficient, you're not making them at the lowest cost, meaning that in the long run other firms are going to produced. These goats are lower cost charge, a lower price and again your profits dropped. The firm's profits dropped and leads to them leaving the market. It's that simple
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