Y12 - Efficiency

Question 1

What is the definition of allocative efficiency?

Answer 1

It occurs where demand equals supply in a market, and that is absolutely true for a business as well, where demand equals supply, and at that point, society surplus is being maximized the sum of producer and consumer surplus. We can’t do any better than that in economics when it comes to allocating scarce resources, then maximizing both consumer and producer surplus. On a business diagram, that is where price equals marginal cost. Price is equal to average revenue, which is equal to demand, and marginal cost is our supply curve. So it is where demand equals supply. But on a business diagram, we can be more formal and say where price equals marginal cost

Question 2

What does it mean for the consumer if a business is being allocatively efficient?

Answer 2

Well, it means that resources are following consumer demand. Consumers are getting exactly what they want in exactly the quantity that they want it in, as well. Consumers getting low prices, which means that there is a maximization of consumer surplus. Very good for consumers. Consumers are getting high choice, so the quantity in the market is high exactly what consumers desire. So high choice and high quality of production as well. Competitive outcomes implies that quality has to be high for firms to set ahead of their rivals. So these are all great things for the consumer

Question 3

For the producer, why is it good for them to be allocatively efficient?

Answer 3

Because it’s a way for them to retain that market share, to increase their market share and to stay ahead of their rivals, who maybe aren’t doing all of these things perfectly. It also means that they can increase their profit by bringing more consumers to them as a result of doing all of these things as well. So producers can, like, being allocatively efficient

Question 4

What is productive efficiency?

Answer 4

Well being hyper technical, it’s the maximization of output at the lowest possible average cost. What you should add on to this definition is that it is the full exploitation of economies of scale, maximum output at the lowest possible average cost

Question 5

When does Productive efficiency occur?

Answer 5

at the lowest point of average cost, you might want to say when marginal cost equals average cost, that’s always going to be the minimum point of average cost.

Question 6

why is productive efficiency good for a consumer?

Answer 6

if the lower average costs are passed on to consumers, consumers may get lower prices, which is great. That means higher consumer surplus, and that comes because of the full exploitation of economies of scale and firms operating at the minimum point of their average cost, that could be great if transferred to consumers via lower prices

Question 7

Why is Productive efficiency good for producers?

Answer 7

it means more production and at lower costs. That’s great because that can translate into higher profits. And it’s good, because if they do pass on the lower costs via lower prices to consumers, it means, again, they can stay ahead of their rivals. They can retain or increase their market share, which is good for the long term position in the industry

Question 8

What is dynamic efficiency?

Answer 8

reinvesting supernormal profit into innovation, R&D, research and development and new technology. The idea is to lower long run average costs over time.

Question 9

What is the condition for Dynamic Efficiency to take place?

Answer 9

It’s super normal profit needed in the long run. So long run, existence of super normal profit can allow for dynamic efficiency to take place

Question 10

Why is Dynamic Efficiency good for consumers?

Answer 10

through reinvestment, we get great, innovative, brand new products, products we didn’t even think could exist in the way that they exist, but do exist, fantastic news for consumers. Through this amazing innovation over time, we get lower prices. Why? Because of new technology, new production techniques come in, new machinery exists, which can lower average costs for the producer, and then that can be transferred to consumers via lower prices over time and over time. If there are new innovative, new products, then new producers might enter the market. We see greater competition, and that can drive prices down as well, all great news for the consumer in the long run, which can then increase consumer surplus for the consumer

Question 11

Why is Dynamic Efficiency good for producers?

Answer 11

loads of reasons why it allows for long run profit maximization by continually looking to innovate, by continually spending on research and development, you can stay ahead of rivals. You can keep high profits by coming up with brand new products and keep up your price. Making ability lower costs over time. Great news for the business right improves efficiency over time, lowers costs over time, which allows them to keep prices low, which allows them to increase profits over time, and, as we’ve said already, to retain or increase market share. Dynamic efficiency might be very important as a way to get ahead of competition, as a way to beat them, as a way maybe to gain patents, copyrights or licenses, which prevents competition copying you, and allows you to get ahead of rivals, of course, to create monopoly power and to really boost profits. So big incentives for companies to be dynamically efficient

Question 12

What is the definition of X-Efficiency?

Answer 12

production with no waste, so no excess cost above average cost is the definition of X efficiency

Question 13

What is the condition for X-Efficiency to take place?

Answer 13

The condition is that production takes place on any point on the average cost curve. So whatever quantity a firm is producing, that quantity should be produced at the average cost line, on the average cost curve, no point above that. That would be wasteful

Question 14

Why is X-Efficiency good for consumers?

Answer 14

costs are being minimized at whatever production point. It means that consumers may get lower prices if those lower costs are passed on to consumers, and that means higher consumer surplus

Question 15

Why is X-Efficiency good for producers?

Answer 15

it means lower costs, therefore higher profit, which is good for them, and it means they can pass on lower prices to the consumer to increase or retain their market share, to stay ahead of their rivals

Question 16

What types of efficiency’s are each of them?

Answer 16

allocative productive and X efficiency is static efficiency, because they take place at one given production point.

dynamic efficiency takes place over time, it is not a static efficiency