3.4.1 efficiencies Flashcards
productive efficiency
when a firm produces at their lowest average total cost
diagram for productive efficiency
AR, MR, ATC and MC curve
equilibrium where MC = ATC
what is meant by allocative efficiency
when a firm produces where the price = marginal cost. P = MC
draw a diagram to show allocative efficiency
AR, MR, MC, ATC curve
equilibrium where MC = AR
what is meant by dynamic efficiency
when there is an increase in efficiency over time caused by innovation and R&D.
name 3 factors that would influence dynamic efficiency
a firm can only be dynamically efficient if they are able to make supernormal profits in the long run and do one of the following with those supernormal profits:
- investment into R&D into capital improvement, which can improve the productivity of capital and hence reduce average total costs over time.
- investment into improving production processes - this might also improve productivity as if there is a better way to complete a task, then this will reduce average total costs over time.
- investment into new products/services - can improve allocative efficiency as the welfare generated by the products improves over time.
compare efficiency between perfectly competitive firms, and those in concentrated markets
the extent of inefficiency depends on the number of existing competitors in the market and the barriers to entry controlling the threat of potential competition. the level of ineffiency in a monopolistically competitive market will be less than that of a monopolistic market.
perfect competition - allocatively efficient in the short and long run. Also productively efficient in the long run only.
Monopolistic competition - slightly allocatively and productively inefficient in the short and long run. it is dynamically efficient
Oligopoly and Monopoly - dynamic efficiency and x-inefficiency only.
what is meant by X-inefficiency
a firm is x-inefficient if it is not producing on its lowest ATC curve. as its chosen level of output, the unit costs of production are higher than they need to be to produce the same level of output.
draw a diagram to illustrate x-ineffiency
two ATC curves, one above the other (actual ATC > lowest possible ATC).
the larger the gap the more x-inefficient the firm is.
what are the conditions that make it more likely for x-inefficiency to exist
if there are high barriers to entry, then the firm is protected from the threat of competition and therefore this makes it more likely for x-ineffiency to exist. the higher the barriers to entry, the more likely it is that x-inefficiency will exist. the number of existing firms is also important as if there are many firms, then an x-inefficient firm is likely to be beaten on price by another firm, thus forcing them to reduce their costs in order to compete.
