In this video, we will discuss how to distinguish economic efficiency and technological efficiency. The following is a part of the transcript. This video requires Flash 8 or above. If it does not start, click the play button to start.

Economic efficiency and technological efficiency is quite confusing. Please remember the following definitions:

Economic efficiency is that the cost per unit product is the lowest.

Technological efficiency is that output cannot be increased without increasing the input(s).

Let’s assume there are 4 ways to produce a car (Method A, B, C, D) and each unit of capital costs $2 and labor costs $1.

By definition, Method D is economically efficient because it produces a car at the lowest cost.

And Methods A, B, D are all technologically efficient. It is because, by definition, we cannot increase output without increasing the input. This can be understood better by inspecting Method C. In order to increase the output, we can switch from Method C to B and then by reducing the labor from 40 to 35 only, we can already produce more than one car! So, Method C is not technologically efficient. For A, B, D, if we try to switch to other methods, we find that we always have to either increase the capital or labor in order to increase the output.