Efficiency

Question 1

Define static efficiency

Answer 1

The efficiency of a firm at a particular point in time
The present level of output

Question 2

Define allocative efficiency and outline the diagram

Answer 2

• producing to consumer demand
• producing at a price that reflects the marginal cost of supply

MC = AR
- when P=MC in all industries and markets in the economy
- when resources are allocated in such a way that consumers and producers get the maximum possible benefit
- demand = supply
- no one can be made better off without making someone else worse off
- no excess demand of supply

Axis: Price, Quantity
MC: tick shape
D=AR=MR: horizontal line
AC: bowl shape

Question 3

Define productive efficiency and outline the diagram

Answer 3

• the level of output when average costs are minimised
• when the firm is producing units of output at the lowest possible cost
• true productive efficiency is at the bottom of the firms LRAC curve

(For the economy it is shown on the PPF and is any point on the curve)

Axis:
Y: costs
X: output
Marginal cost: tick shape
Average cost: bowl shape
- curve should intersect at the bottom of the AC curve

Question 4

Define efficiency

Answer 4

making the best use of scares resources to help satisfy changing wants and needs

Question 5

Define dynamic efficiency

Answer 5

• improvements in other types of efficiency (mostly productive) that occur over time because of innovation and investment in r&d
• occurs in the long run
• from technical progress and innovation

Question 6

Define x-inefficiency

Answer 6

• when a firm is producing above its AC curve
• in a monopoly, the firm can increase price rather than keep costs ow