LS7- Efficiency

Question 1

Efficiency

Answer 1

• Concerned with the relationship between scarce inputs and outputs

Question 2

Productive efficiency

Answer 2

• When a firm is operating at the lowest point on its AC curve, exploiting EoS

Question 3

Allocative efficiency

Answer 3

• Uses the forces of supply and demand to allocate resources in a way to maximise overall welfare
• When AR = MC

Question 4

X-inefficiency

Answer 4

• When operating above the AC curve, i.e. AC is higher than lowest possible due to inefficiencies

Question 5

Static vs Dynamic efficiency

Answer 5

• Static: Allocative, Productive and X-inefficiencies (occurs at one specific point)
• Dynamic: occurs over time

Question 6

Problem with trying to increase both productive and allocative efficiency

Answer 6

• there is a potential conflict
• cutting costs to be more productively efficient can compromise the quality of a good -> fall in allocative efficiency

Question 7

Why may a business be x-inefficient?

Answer 7

• monopolies may lack a competitive drive to minimise costs due to complacency
• public sector firms are not profit motivated
• it is difficult to reduce costs as it may mean cutting wages or removing perks

Question 8

Predatory pricing

Answer 8

• when firms sets prices below its production costs to drive out competition, with the intention of later raising prices to a more profitable level once competitors have been eliminated