3.4.1 Efficiency

Question 1

Efficiency can be used to judge how well the market _____ ____ and the relationship between _____ ____ and ______.

Answer 1

allocates resources, scarce inputs, outputs

Question 2

List the diffrent kinds of efficiency/inefficiency?

Answer 2

1) Allocative
2) Productive
3) Dynamic
4) X-inefficiency

Question 3

What is Allocative efficiency?

Answer 3

-Achieved when resources are used to produce goods and services which consumers want and value most highly and social welfare is maximised.
-It will occur when the value to society from consumption is equal to the marginal cost of production, where P=MC.

Question 4

What is productive efficiency?

Answer 4

-A firm has productive efficiency when its products are
produced at the lowest average cost so the fewest resources are used to produce each product.
-The minimum resources are used to produce the maximum output.
-This can only exist if firms produce at the bottom of the AC curve, in the short run this is where MC=AC.
-It is only possible if there is technical efficiency, where a given output is produced with minimum inputs- but not all technically efficient firms are productively efficient.

Question 5

What is Dynamic efficiency?

Answer 5

-This is achieved when resources are allocated efficiently over time. It is concerned with investment, which brings new products and new production techniques.
-The alternative is static efficiency: efficiency at a set point in time.
- Allocative and productive efficiency are examples of static efficiency.
-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.

Question 6

What is X-inefficency?

Answer 6

-If a firm fails to minimise its average costs at a given level of output, it is X-inefficient and there is organisational slack.
-This is a specific type of productive inefficiency as it occurs when they fail to minimise their cost for that specific output.
-For example, the minimum point on the AC curve may be at 100 goods at a cost of £5 each.
- The firm is producing 125 goods and so is not productively efficient.
-It costs them £8 to produce each good, but they could produce 125 goods at £7.
-Therefore, they are X-inefficient since they are not producing on the lowest AC curve.
-It often occurs where there is a lack of competition so firms have little incentive to cut costs.

Question 7

Draw a digram to show X-inefficiency.

Answer 7

Question 8

Draw allocative efficiency on a digram.

Answer 8

Question 9

Draw productive efficiency on a digram

Answer 9