Efficiency

Question 1

Define Allocative Efficiency

Answer 1

When firms are producing goods and services where resources perfectly follow consumer demand, maximsing society surplus

Condition : P = MC / MC = AR

Question 2

Define Productive Efficiency

Answer 2

When a firm is operating at the lowest point of their AC curve, with full exploitation of economies of scale

Question 3

Define X-Efficiency

Answer 3

When firms produce on their AC curve to minimise wastage

Question 4

Define Dynamic Efficiency

Answer 4

When firms reinvest LR supernormal profits into advancements. The idea is to lower LRACs over time.

Condition = MC = MR, Profit Max

Question 5

What are the Benefits of Allocative Efficiency For a Consumer?

Answer 5

• Resources perfectly follow consumer demand
• Increased availability of choice
• Quality is implied due to competition
• Lower prices are passed onto consumers
• Consumer surplus is maximised

Question 6

What are the Benefits of Allocative Efficiency for a Producer?

Answer 6

• More consumers are attracted to the lower prices
• This retains / increases market share
• Profitability increases and firms stay ahead of rivals

Question 7

What are the Benefts of Productive Efficiency for a Consumer?

Answer 7

• Firms pass on lower AC in terms of lower prices and exploitation of economies of scale
• Consumer surplus is increased

Question 8

What are the Benefts of Productive Efficiency for a Producer?

Answer 8

• Exploiting economies of scale allows lower production costs due to increased output and growth
• This leaves more contribution towards profits
• Market share and competitveness increases

Question 9

What are the Benefts of X-Efficiency for a Consumer?

Answer 9

• Firms minimise waste, which lowers ACs
• This is passed on as lower prices
• Consumer surplus is maximised

Question 10

What are the Benefts of X-Efficiency for a Producer?

Answer 10

• Minimsing waste leads to lower production costs
• Lower production costs increases profit margins
• Consumers are likely to buy from a efficienct firm
• Market share increases as profitability increases
• Firms stay ahead of competition

Question 11

What are the Benefts of Dynamic Efficiency for a Consumer?

Answer 11

• Reinvestment of LR SNP brings in new innovation, technological advancements and products for consumer
• This increases quality and choice as competition is attracted to enter a thriving market
• Lower LRAC over time as supply increases
• Lower costs of production lead to lower prices
• Consumer surplus increases

Question 12

What are the Benefts of Dynamic Efficiency for a Producer?

Answer 12

• Can allow LR Profits to be sustained overtime through advancements
• LRAC reduce over time, increasing competitiveness
• Firms stay ahead of rivals
• Firms increase their market share
• Firms may be able to gain patents/copyrights to fence competition