what is allocative efficiency?
- when resources are used to produced the goods and services that consumers want, and social welfare is maximised
- value to society from consumption is equal to the marginal cost of production
- where MC=AR
- allocative inefficiency means that the value that consumers place on the last unit bought is greater than the cost of producing that unit, so the good is being underproduced
- this creates a welfare loss to consumers in the area shaded, because between the profit maximising level of output and the allocatively efficient level of output, the price is always above the marginal cost
- the price of the good is too, high, and the quantity too low
what is productive efficiency
- when products are produced at the lowest average total cost
- MC = AC
- the minimum quantity of resources is used to produce the maximum amount of output
what is dynamic efficiency
- dynamic efficiency is the idea that resources are allocated efficiently over time.
- firms become more productively efficient over time, because they can use supernormal profits that they have made, to invest in research and development, and in improving the technology that they currently use to lower their costs per unit
- supernormal profit is required
- occurs in oligopolies and monopolies
what is X-inefficiency
- when a firm fails to minimise it average costs at a given level of output, then it is considered X-inefficient
- not producing on the lowest AC curve
- occurs when there is a lack of competition, so little incentive to cut costs
what are the efficiencies of firms in perfect competiton
- productively efficient
- allocatively efficient
- x-efficient
- not dynamically efficent
are firms in perfect competition allocatively efficient (short run and long run)
- yes, in the short run and long run
- P=MC
are firms in perfect competiton productively efficient
(short run and long run)
- in the short run, no
- in the LR, yes
are firms in perfect competition dynamically efficient
- unlikely as have no supernormal profits to reinvest
are firms in perfect competition x-efficient
- yes
- firms are forced to produce at the lowest cost they can in order to make normal profits in the long run, otherwise they would make a loss
what are the efficiencies/lack of efficiencies of a monopoly firm
- allocative efficiency - not allocatively efficient as not where P=MC
- productive efficiency - no - not producing at the lowest average cost, where MC=AC
- dynamic efficiency - yes
- x-inefficient - yes
is a monopoly firm allocatively efficient
- allocative efficiency - not allocatively efficient as not where P=MC
- producing at a higher price, leading to a welfare loss
- regressive effects on lower income earners
- the producer is extracting a price from consumers which is above the cost of resources to the firm, therefore consumers wants are not being satisfied, and the good is being underconsumed
is a monopoly firm productively efficient
- productive efficiency - no - not producing at the lowest average cost, where MC=AC
- AC at which they produce is higher than the minimum ATC
is a monopoly firm dynamically efficient
Dynamic efficieny
- yes
- able to reinvest profits that they have made, into improving the quality of their product, through research and development
- they can also reinvest the profits into buying technology which will make their operations more productive, thus lowering their average costs, which could feed through to lower prices for consumers
is a monopoly firm x efficient
X-efficiency
- not x-efficient, because there is a lack of competition.
- therefore, they can get away with not have the most efficient production process, so they might not have the newest technology, or the most organised method of production
- consequently, the firms costs will be shifted up - higher than ATC curve
what are the efficiencies in monopolistic comp
- not allocatively efficient
- not productively efficient
- not dynamically efficient, as no supernormal profit in the long run
why/why not are firms in monopolistic comp allocatively efficient
- not allocatively efficient
- the price is above the marginal cost
why/why not are firms in monopolistic comp productively efficient
- not productively efficient
- not producing at the an output where the average total cost is at its lowest
why/why not are firms in monopolistic comp dynamically efficient
- not dynamically efficient
- no supernormal profit in the long run
what are the efficiencies in an oligopoly market and why
- no allocative efficiency
- no productive efficiency
- dynamic efficiency - yes
- x - inefficiency - yes
