3.4.1 efficiencies

Question 1

productive efficiency

Answer 1

when firms produce at the lowest point on the average cost curve
All points on the PPF curve are productively efficient.

Question 1

Allocative efficiency:

Answer 1

• when resources are used to produce exactly what people want, in the right amounts.
• It happens when the price of a product equals the cost to make one more. (P=MC)
• This balance avoids waste and gives customers the best value.

occurs in Free markets

Question 2

Dynamic efficiency:

Answer 2

• when resources are used efficiently over time, focusing on innovation to lower future costs or create new products.
• It ensures that consumer needs continue to be met as markets evolve.
• Short-term factors like demand, interest rates, and profits affect it.
• Often involves higher short-term costs for future cost savings.
• There’s a time lag for investments to lead to lower costs, and firms may balance between paying dividends and investing in innovation.

Question 3

X efficiency

Answer 3

A firm is x-inefficient when it is producing within the AC boundary. Costs are higher
than they would be with competition in the market.

This 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