Explain the economics tools that help to measure economic efficiency.

Economic efficiency means resources are allocated and used optimally, and it is reached in a market when the marginal benefit of consumption equals the marginal cost of production (MB = MC); the main tools used to measure it are consumer's surplus, producer's surplus and total surplus, supported by the ideas of productive and allocative efficiency.

1. Consumer's surplus: it is the difference between what a consumer is willing to pay and what they actually pay, introduced by A.J. Dupuit and developed by Marshall.
2. Basis of consumer surplus: it rests on diminishing marginal utility — the more a consumer has, the less they will pay for one more unit — so the earlier units yield a surplus.
3. Formula for consumer surplus: Consumer's Surplus = Total Utility − Total Amount Spent; graphically it is the area below the demand curve and above the price line. For example, being willing to pay Rs. 25,000 for a phone that costs Rs. 20,000 gives a surplus of Rs. 5,000.
4. Producer's surplus: it is the difference between the price a producer actually receives and the lowest price they were willing to accept (their economic cost).
5. Formula for producer surplus: Producer's Surplus = Actual Sale Price − Willingness-to-Sell Price; graphically it is the area above the supply curve and below the market price line. A firm willing to sell at Rs. 1,000 that receives Rs. 1,500 earns a surplus of Rs. 500.
6. Total surplus: it is the sum of consumer surplus and producer surplus and measures the overall benefit society gains from a market at equilibrium (Total Surplus = CS + PS).
7. Efficiency at equilibrium: total surplus is maximised at the equilibrium price and quantity, which is why the competitive equilibrium is treated as efficient.
8. Productive efficiency: output is produced at the minimum average cost (P = AC minimum), so no resources are wasted in production.
9. Allocative efficiency: price equals marginal cost (P = MC), so the right goods are produced in the right amounts to match what society values.
10. Overall test of efficiency: the market is efficient when marginal benefit equals marginal cost; the surplus measures show whether that condition is met and how much welfare the market generates.