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Productive efficiency

Productive efficiency is achieved when a firm is producing at the lowest possible average cost. This is at the bottom of the average cost curve.

Productive efficiency is achieved if and only if the firm is producing at the point where AC = MC.

Allocative efficiency

Allocative efficiency is achieved when the cost of producing a good is equal to the price consumers are willing to pay - this is how much the consumer values the good. At this point, welfare is maximised. Pareto optimality is achieved. No one can be made better off without making someone else worse off.

The condition for allocative efficiency is AR = MC (AR is equal to the price by definition).

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