Posted in Finance, Accounting and Economics Terms, Total Reads: 506
Definition: Efficiency Principle
Efficiency Principle is an economic theory that relates the efficiency of an organization with the marginal benefit and marginal cost of a product it produces. According to this theory, the greatest benefit can be achieved by a society is when the marginal social costs of all the allocation are equivalent to the marginal benefits from all the allocation of resources.
The efficiency principle forms the theoretical framework for the cost-benefit analysis. The cost benefit analysis helps in determining how certain business decisions are made regarding the allocation of resources.
However, the usefulness of the efficiency principle becomes questionable in practical scenarios as there are a lot of assumptions made for determining the marginal social costs and hence are not always applicable for practical purposes.