3.4.1 Economic Efficiency Flashcards
What is Allocative efficiency
Resources follow consumer demand (S=D)
Net Social benefit is maximised (MSC=MSB)
AR = MC
Benefits for consumers of allocative efficiency
consumer surplus is maximised
large choice as quantity is big
high quality due to competitive outcomes
Benefits to producers of allocative efficiency
Retain/increase market share by staying ahead of rivals
What is productively efficient
Firm is operating on the lowest part of the AC curve
Full exploitation of economies of scale
benefits to consumers of productive efficiency
lower AC passed onto consumer = lower prices = larger consumer surplus
Benefits to producers of productively efficient
more production at lower costs = higher profits and outcompeting rivals = increase/retain market share
What is X-efficiency
Production takes place on AC curve, minimising waste
Benefits to the consumer of X-efficiency
costs being minimised could be passed onto consumers = higher consumer surplus
Benefits to the producer of X-efficiency
Lower costs = high profit and increase in market share,
more likely to occur in public sector than monopolies
What is dynamically efficient
Reinvesting supernormal profits back into the business, new capital/tech + innovation•Condition: is long-run supernormal profit
Benefits to consumer of dynamically efficient
New innovative products
lower prices over time through more productive efficiency
increased contestability
driving down prices = increasing consumer surplus
benefits to the producer of dynamically efficient
Long-run profit maximisation through innovation/research
lower costs due to increased efficiency
increased market share
