3.4.1 Efficiency

Question 1

what is meant by allocative efficiency

Answer 1

• price = MC
• achieved when resources are used to produce goods and services which consumers want and value the most-> social welfare maximised

Question 2

what is meant by productive efficiency

Answer 2

• goods and services are produced at the lowest possible AC (MC=AC)

Question 3

what is meant by dynamic efficiency

Answer 3

• achieved when resources are allocated efficiently overtime
• concerned w/ investment and the willingness to innovate
• SNP provides firms w the incentive to invest and the ability to do so

Question 4

what is meant by X-inefficiency

Answer 4

• lack of competition -> firms operate at unnecessarily higher costs -> firms become complacent due to less pressure -> wasted resources -> inefficiency -> produce within the AC boundary

Question 5

causes of X-inefficiency

Answer 5

• poor management e.g. they emplou too many workers or has too many production sites
• businesses would rather satisfice profits than maximise them
• principal-agent problem -> management and stakeholders have conflicting objectives
• lack of motivation

Question 6

what types of efficiency are achieved in perfectly competitive markets?

Answer 6

• allocative efficiency in the SR AND LR -> no one can be made better off without making at least one person worse off -> ‘Pareto optimal allocation of resources’
• productive in the LR ONLY (normal profit made)
• no dynamic due to homogenous goods -> little scope for innovation

Question 7

what types of efficiency are achieved in monopolistically competitive markets?

Answer 7

• price > MC = not allocative
• not productive: lots of businesses -> unable to fully exploit EoS -> causes AC to be higher -> unable to produce at the lowest average cost (also due to heterogeneous goods)
• can compete on product differentiation -> more spending on advertising, marketing, innovation -> dynamic efficiency

Question 8

what types of efficiency are achieved in oligopolistic markets?

Answer 8

• not allocative -> they engage in price competition
• can invest in R&D = dynamic efficiency
• productive efficiency depends on the industry

Question 9

what types of efficiency are achieved in monopoly markets?

Answer 9

• can be productively efficient (can exploit EoS)
• price > MC = not allocative