3.4.1 - Efficiency

Question 1

State 4 types of efficiency

Answer 1

• allocative efficiency
• productive efficiency
• dynamic efficiency
• x efficiency

Question 2

Describe productive efficiency

Answer 2

productive efficiency occurs at the lowest cost per unit of output, or the lowest point of the average cost curve. The firm is producing as much as possible relative to inputs (minimum resources used to produce maximum output)
MC = AC

Question 3

Equation for productive efficiency

Answer 3

MC = AC

Question 4

Equation for allocative efficiency

Answer 4

P = MC

Question 5

Describe allocative efficiency

Answer 5

• resources are used to produce goods and services which consumers want and value most highly and social welfare is maximised
• value of society from consumption = MC
• firms will charge a price equal to marginal cost (P = MC) of manufacturing a good - this is where price charge for the last unit is equal to the cost of making the last unit so next welfare falls if more units are produced
  Also where supply matches demand

Question 6

Describe dynamic efficiency

Answer 6

This is achieved when resources are allocated efficiently over time. It is concerned with investment, which brings new products and new production techniques.

ESSENTIALLY INVESTMENT INTO R AND D AND INNOVATION TO IMPROVE GOODS AND SERVICES OVER TIME THUS MEETING CHANGING CONSUMER WANTS AND NEEDS

Question 7

Describe X inefficiency

Answer 7

Occurs when AC is greater than lowest possible average cost (basically a firm operates above it’s AC curve due to a lack of competition)

Question 8

Where does X inefficiency occur

Answer 8

• in highly concentrated markets such as monopoly and oligopoly where firms are able to make supernormal profits and have an AR that is greater than their AC so reduced need to lower AC AND X inefficiency

Question 9

How is dynamic efficiency achieved (what conditions)

Answer 9

Dynamic efficiency will be achieved in markets where competition encourages innovation but where there are differences in products and copyright/patent laws. Supernormal profit is required to provide firms with the incentive to invest and the ability to do so.