Concept of Efficiency - Economics Concepts, Business Economics & Finance Video Lecture | Business Economics & Finance - B Com

the topic of this presentation is what
is economic efficiency
strictly speaking there's a very precise
definition of what economic efficiency
is but the precise definition is
something like this a situation is
efficient if there are no possible
purrito improvements now while that is
correct it's not very helpful because
the concept of a Pareto improvement is
somewhat technical and because it also
refers to what's merely possible and the
absence of something being possible it's
rather a complicated idea to hold in
your head there is however an imprecise
definition it's not strictly correct
it's not always gonna be helpful but
it's remarkably intuitive much easier to
grasp and it's very very similar to the
precise definition the idea here is
simply there is no waste we will have
some intuitive idea of what waste is and
economic efficiency is simply avoiding
waste let's illustrate with a very
simple example suppose I am a farmer and
I grow strawberries but I hate
strawberries in fact it's not clear why
I'm growing them maybe I just inherited
the farm that had strawberries but I've
grown them and realizing I don't like
the taste I throw them in the bin this
would strike all of you I assume as
obviously wasteful
being wasteful it's not efficient so how
would you eliminate the waste and
achieve a more efficient outcome well
for instance I could just give the
strawberries to my neighbor who likes
them very much my neighbor says thank
you I'll enjoy those strawberries needs
them that's a scenario which appears to
be certainly relative to the original
efficient now it's also a situation in
which we've eliminated waste what has
that got to do then with our original
precise definition that is situations
efficient if there are no possible
purrito with improvements and first
let's explain why in the terms of that
precise definition why this original
arrangement where I plan to just throw
the strawberries away why is that
inefficient it's inefficient because
there is a possible Pareto improvement a
Pareto improvement is just this it is
some sort of transaction or change
whereby somebody improves their
situation and nobody is made worse off
so at least one person is better off and
nobody is made worse off that's a Pareto
improvement and notice that's exactly
what happens in the transaction when I
give the strawberries to my neighbor I'm
not made any worse off because I
wouldn't have used them anyway but my
neighbor is made better off so if I just
throw them in the bin and refuse to give
them away I'm being inefficient because
I'm failing to take up a possible Pareto
improvement now does that mean that the
situation where I give all the
strawberries to my neighbor is
definitely efficient well we need more
information to know that what if I give
my neighbor five tons of strawberries
but unfortunately my neighbor can only
eat about 5 kilos before he feels
thoroughly sick in that case there is
still waste in this scenario unless the
neighbor does something else with the
strawberries there is there are further
purrito improvements no doubt possible
because there'll be other people who
might want to buy or be given the
remainder so that's it that's the simple
concept of economic efficiency precisely
defined in terms of premier improvements
but as you can see it converges pretty
neatly was the idea of absence of waste