3.4 - Efficiency

Question 1

Allocative efficiency

Answer 1

• When the cost of producing the good is well matched to how much a consumer is willing to pay for it
  > find at (p=mc)
  > meaning that the market is producing the quantity of the good that maximises consumer and producer surplus.
  > max social welfare and max utility

Question 2

Productive efficiency

Answer 2

• When a firm produces goods and services at the lowest possible cost
  > It implies that resources are being used efficiently to minimise production costs.
  > In competitive markets, productive efficiency is realised when firms produce at the minimum point of their average cost curve (AC = MC).

> firms can lower prices and still maintain profit margins.

Question 3

Dynamic efficiency

Answer 3

The optimal rate of innovation and investment to improve production processes to reduce average costs
> It involves the long-term competitiveness and growth potential of a firm
> Dynamic efficiency is linked to innovation, technological progress, and the ability to adapt to changing circumstances.

Question 4

X - inefficiency

Answer 4

Occurs when a firm lacks the incentive to control costs. This causes the average costs of production to be higher than necessary
> can arise due to factors such as: poor management, lack of motivation, or the absence of competition. (no competitive pressures)

Question 5

When might X- inefficiency persist

Answer 5

> X-inefficiency can persist in markets where firms have market power.

Question 6

What type of efficiencies arise in perfect competition?

Answer 6

• Allocative and Productive efficiency are typically achieved
  > because firms are price takers and have no market power. Resources are allocated efficiently, and firms produce at minimum cost.

> no dynamic efficiency as they don’t make supernormal profit

Question 7

Why are firms operating under perfect competition unlikely to achieve dyanamic efficiency?

Answer 7

• No supernormal profits in long run to reinvest

Question 8

What efficiencies are likely to arise in monopolies?

Answer 8

• Allocative inefficient because they can set prices above marginal cost, resulting in deadweight loss.
• However, a monopoly can be productively efficient if it operates at the minimum point of its average cost curve.
• Dynamically efficient if reinvest supernormal profits

Question 9

What type of efficiencies are likely to arise in monopolistic competition?

Answer 9

• firms may not achieve allocative efficiency because they have some degree of market power
  but they compete on product differentiation.
• Productive efficiency may not be fully realised either, as firms may operate at less than minimum average cost due to product differentiation.
• Dynamic efficiency

Question 10

What efficiencies may arise in oligopolies?

Answer 10

• Oligopolistic firms can engage in price competition, leading to allocative inefficiency.
• However, they may invest in research and development, contributing to dynamic efficiency.
• Whether productive efficiency is achieved depends on the specific industry.

Question 11

Government intervention for efficiency in mixed/regulated markets

Answer 11

In some industries, governments may intervene to promote allocative and productive efficiency through regulations, subsidies, or antitrust policies.