what is allocative efficency?
the price that consumers pay equals the marginal cost of the scarce resources used up in production
P=MC
where consumer and producer surplus is maximsed
what are the consequences of allocative inefficency?
- consumer surplus is turned into producer surplus , leading to a deadweight loss of consumer welfare (traingle in diagram)
- higher prices reduces consumer reaal incomes
how will a firm operating in perfect competiton achieve allocative efficency?
chains of reasoning
- This is because in a perfectly competitive market there are no barriers to entry.
- As a result, if supernormal profits are being made in the short run this acts as a signal to new firms to enter the market.
- This will cause an outwards shift of market supply which in turn will lead to the market price falling to a level where price =ATC
- In the long run, a price taking firm will produce at an output where AR=ATC and also where price=MC
explain why an unregulated monopoly is likely to lead to high prices that cause a loss of allocative efficiency.
diagram+ analysis
- Firms with monopoly power can set higher prices than in a competitive market.
- An unregulated monopoly supplier is highly likely to be allocatively inefficient because in monopoly the price is greater than MC.
- In a competitive market, the price would be lower and more consumers would benefit from purchasing the good.
- A monopoly results in dead-weight welfare loss of consumer and producer surplus.
what is productive efficency?
when producers minimise the wastage of resources.
* lowest point of AC (AC=MC)
* in long run- the MES point on LRAC
what is dynamic efficency?
(happens overtime) caused by innovation with markets and leads to improvements in range of choice/ performance, reliability and quality of products
what is X ineffiecency?
lack of competiton means that average costs are higher than they would be with competition
operating above the LRAC
what are the causes of X inefficiency
- managerial slack
- principle agnet problem: eg choosing job security over risk
- weak incentives to invest in new ideas
- productive slack
