3.4.1

Question 1

Allocative efficiency

Answer 1

Occurs when resources are distributed to the goods and services that consumers want
This maximises utility
Free markets are considered to be allocatively efficient

Question 2

Productive efficiency

Answer 2

When firms produce at the lowest point on the short run or long run average cost curve

Question 3

Static efficiency

Answer 3

Allocative and productive efficiency

Question 4

Dynamic efficiency

Answer 4

When resources are allocated efficiently over time, and the rate of innovation is at the optimum level, which leads to falling long run average costs

Question 5

What is dynamic efficiency affected by

Answer 5

Short run factors, interest rates and past profitability

Question 6

How can dynamic efficiency be evaluated

Answer 6

By considering the long time lag between making an investment and having falling average costs and by considering how factors change in the long run

Question 7

X-inefficiency

Answer 7

A firm is x-inefficient when it is producing within the AC boundary

Question 8

Why could there be x-inefficiency

Answer 8

Could be due to organisational slack, a waste in the production process, poor management, or simply laziness
Monopolies tend to be x-inefficient, since they have little incentive to lower their average costs because of the lack of competition they face