3.1.9 - Efficiency Flashcards
What is Static Efficiency
Efficiency achieved in the present by optimizing resource allocation and usage without regard for future impacts.
What types of Efficiency are Static?
- Allocative Efficiency
- Productive Efficiency
- X-Efficiency
What is Dynamic Efficiency
Efficiency achieved over time through innovation, investment, and adaptation
How does dynamic efficiency differ from static efficiency?
Dynamic efficiency considers long-term improvements, while static efficiency focuses solely on current resource use.
What is allocative efficiency?
Allocative efficiency occurs when resources are allocated to where they are most demanded, maximizing satisfaction in an economy given finite resources.
At what point does allocative efficiency occur?
- Allocative efficiency occurs at the point where P = MC (price equals marginal cost of production).
- For example, on a perfect competition diagram, Allocative efficiency occurs at Price P and Quantity Q*, where P=MC
What does it mean if price is less than marginal cost?
If price is less than marginal cost, society gained less from the consumption of the last unit than it cost to make, indicating that the last unit should not have been produced.
What does it mean if price is above marginal cost?
If price is above marginal cost, society has gained more than it has cost to make, indicating that more should have been produced.
What condition must be met for allocative efficiency to hold true?
Allocative efficiency holds true only if there are no externalities involved.
Fill in the blank: Allocative efficiency occurs when _______.
P = MC
True or False: Allocative efficiency can occur when externalities are present.
False
What happens to societal satisfaction at the point of allocative efficiency?
Societal satisfaction is maximized.
What is Pareto Efficiency?
- A state where no one can be made better off without making someone else worse off.
- All opportunities for improvement have been exhausted.
How are Pareto efficiency and allocative efficiency connected?
When all markets achieve allocative efficiency, Pareto efficiency is achieved because resources are perfectly allocated without opportunities for improvement.
Does Pareto efficiency imply fairness or equality?
No, Pareto efficiency ensures no waste but does not guarantee equity or fairness.
What is productive efficiency?
Occurs when production is at the lowest possible average cost
This implies that the fewest scarce resources are used to make the product.
When does productive efficiency occur in terms of cost?
When marginal cost (MC) equals average cost (AC)
This indicates that the production is optimized.
What is X-efficiency?
Occurs when a firm is producing on, rather than above, its AC curve
What does the AC curve represent?
The lowest possible cost of producing at each level of output
What factors can lead to X-inefficiency?
- Lazy workers
- Incompetent managers
- Organisational slack
What is the difference between X-efficiency and productive efficiency?
X-efficiency occurs at the AC curve, while productive efficiency occurs at the lowest point of the AC curve
What does the actual ATC reflect in terms of efficiency?
The x-inefficient situation
What is required for productive efficiency to occur across all markets?
Producing on the PPF (Production Possibility Frontier)
True or False: It is common to refer to a firm as x-efficient.
False
Fill in the blank: The actual ATC curve shows no productive efficiency at its lowest point because it is still _______.
x-inefficient
What is the significance of the lowest point of the AC curve?
It indicates where productive efficiency occurs
What two forms can Dynamic Efficiency typically take?
1) Lower Costs - A firm can produce at a lower average cost (AC) because it invents or invests in new technology.
2) Better Products - A firm can produce better goods because it invents or invests in new technology.
What does Dynamic Efficiency observe?
Whether the firm or industry is getting more efficient over time due to reinvestment into itself.
