3.4.1

Question 1

what is allocative efficency?

Answer 1

the price that consumers pay equals the marginal cost of the scarce resources used up in production

P=MC

where consumer and producer surplus is maximsed

Question 2

what are the consequences of allocative inefficency?

Answer 2

• consumer surplus is turned into producer surplus , leading to a deadweight loss of consumer welfare (traingle in diagram)
• higher prices reduces consumer reaal incomes

Question 3

how will a firm operating in perfect competiton achieve allocative efficency?

chains of reasoning

Answer 3

• This is because in a perfectly competitive market there are no barriers to entry.
• As a result, if supernormal profits are being made in the short run this acts as a signal to new firms to enter the market.
• This will cause an outwards shift of market supply which in turn will lead to the market price falling to a level where price =ATC
• In the long run, a price taking firm will produce at an output where AR=ATC and also where price=MC

Question 4

explain why an unregulated monopoly is likely to lead to high prices that cause a loss of allocative efficiency.

diagram+ analysis

Answer 4

• Firms with monopoly power can set higher prices than in a competitive market.
• An unregulated monopoly supplier is highly likely to be allocatively inefficient because in monopoly the price is greater than MC.
• In a competitive market, the price would be lower and more consumers would benefit from purchasing the good.
• A monopoly results in dead-weight welfare loss of consumer and producer surplus.

Question 5

what is productive efficency?

Answer 5

when producers minimise the wastage of resources.
* lowest point of AC (AC=MC)
* in long run- the MES point on LRAC

Question 6

what is dynamic efficency?

Answer 6

(happens overtime) caused by innovation with markets and leads to improvements in range of choice/ performance, reliability and quality of products

Question 7

what is X ineffiecency?

Answer 7

lack of competiton means that average costs are higher than they would be with competition

operating above the LRAC

Question 8

what are the causes of X inefficiency

Answer 8

• managerial slack
• principle agnet problem: eg choosing job security over risk
• weak incentives to invest in new ideas
• productive slack