Economic Efficiency

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DEFINITION of 'Economic Efficiency'

A broad term that implies an economic state in which every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency. When an economy is economically efficient, any changes made to assist one person would harm another. In terms of production, goods are produced at their lowest possible cost, as are the variable inputs of production.

Some terms that encompass phases of economic efficiency include allocational efficiency, production efficiency and Pareto efficiency.

BREAKING DOWN 'Economic Efficiency'

A state of economic efficiency is essentially just a theoretical one; a limit that can be approached but never reached. Instead, economists look at the amount of waste (or loss) between pure efficiency and reality to see how efficiently an economy is functioning.

Measuring economic efficiency is often subjective, relying on assumptions about the social good created and how well that serves consumers. Basic market forces like the level of prices, employment rates and interest rates can be analyzed to determine the relative improvements made toward economic efficiency from one point in time to another.

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