Theme 3 Topic 4.1

Question 1

What are the 4 types of efficiencies ?

Answer 1

1. Allocative Efficiency
2. Productive Efficiency
3. Dynamic Efficiency
4. X - inefficiency

Question 2

Allocative efficiency

Answer 2

Occurs at the level of output where average revenue = marginal cost (AR = MC)
At this point, resources are allocated in a way that consumers and producers receive the maximum possible benefit
No one can be made better off without making someone else worse off
There is no excess demand or supply

D= AR
S = MC

Question 3

Productive efficiency

Answer 3

Occurs at the level of output where marginal cost = average cost (MC=AC)
At this point, average costs are minimised
There is no wastage of scarce resources and there is a high level of factor productivity.
Exploitation of EOS.
Firm operates at the lowest point of the AC curve.

Question 4

Dynamic efficiency

Answer 4

Long-term efficiency is a result of innovation as a firm reinvests its profits
It results in improvements to manufacturing methods
This lowers both the short-run and long-run average total costs
LR supernormal profit

Question 5

X inefficiency

Answer 5

When a firm lacks the incentive to control production costs.
Slack occurs because of this (underutilisation of an economy’s productive resources like unused machinery)
The ATC is higher than it should be.
It often occurs in an industry if there is a lack of competition or in a firm that isn’t accountable for making a loss (e.g. some government owned companies).
Production takes place above average cost curve.

Question 6

What are market structures

Answer 6

The characteristics of the market in which a firm or industry operates

Question 7

What do market structures characteristics include ?

Answer 7

The number of buyers
The number and size of firms. The market’s concentration ratio
The type of product in the market (homogenous or differentiated)
The types of barriers to entry and exit
The degree of competition

Question 8

What can market structures be separated into ?

Answer 8

Perfect and imperfect competition

Question 9

What does imperfect competition include ?

Answer 9

1. Monopolistic
2. Oligopoly
3. Monopoly

Question 10

Perfectly competitive market diagram observations

Answer 10

The firm produces at the profit maximisation level of output, where MC=MR (Y)
The firm is productively efficient as MC=AC at this level of output
The firm is allocatively efficient as AR (P)=MC
The firm is unlikely to experience dynamic efficiency as it is unlikely to have supernormal profits to reinvest

Question 11

Imperfectly competitive market diagram observations

Answer 11

The firm produces at the profit maximisation level of output, where MC=MR (A)
The firm is not productively efficient as AC > MC at this level of output (B-A)
Productive efficiency would occur at point E, where MC=AC
The firm is not allocatively efficient as AR (P) > MC at this level of output (D-A)
Allocative efficiency would occur where AR=MC
The firm is likely to experience dynamic efficiency as it will be able to reinvest its profits so as to increase innovation

Question 12

X efficiency

Answer 12

Minimising waste

Operates on the AC curve

Question 13

Which efficiencies are static and which occur over time

Answer 13

Allocative, productive, X efficient = static (one given production point)

Dynamic = over time

Question 14

Allocative consumer analysis

Answer 14

Resources follow consumer demand (they get what they want)
They get low prices, so maximised consumer surplus
High choice (quantity higher)
High quality of production (competitive outcomes)

Question 15

Allocative producer analysis

Answer 15

Retain or increase market share
Stay ahead of rivals who aren’t efficient
Can increase profits by bringing more consumers to them

Question 16

Productive consumer analysis

Answer 16

Lower prices
Higher consumer surplus
Due to full exploitation of EOS (operate at minimum point on AC)

Question 17

Productive producer analysis

Answer 17

More production at lower average costs
Means higher profits
Lower prices and so greater market share as they stay ahead of rivals

Question 18

Dynamic consumer analysis

Answer 18

New innovative products
Lower prices over time (new technology and production techniques lowering AC)
New producers can enter market due to new products so greater competition, further lowering prices
Higher consumer surplus

Question 19

Dynamic producer analysis

Answer 19

LR profit max
Lower costs over time (improves efficiency)
Retain and increase market share
Stay ahead of rivals (can gain patents, copyrights, licenses, preventing competition from copying the business and to create monopoly power)

Question 20

X efficiency consumer analysis

Answer 20

Lower prices (costs are minimised)
Higher consumer surplus

Question 21

X efficiency producer analysis

Answer 21

Lower costs
Higher profits
Can lower prices and retain market share and stay ahead of rivals