3.4.1 - EFFICIENCIES Flashcards
Define efficiency
This is how well firms use scarce resources to meet the wants and needs of consumers.
What is allocative efficiency?
This is where resources follow consumer demand, and social benefit and society surplus is maximised.
It is when P=MC or AR=MC
How can firms become more allocatively efficient?
They can do this buy doing anything that benefits society
- reducing prices
- increasing quality of products
- investing in R&D to come up with better and improved products to increase consumer choice
- increased marketing
Why are all firms not allocatively efficient?
For firms to be allocatively efficient and operate at P=MC, their SNP’s would be reduced and this is why not many firms are incentivised to be allocatively efficient.
Normally public service firms are allocatively efficient for example charities and government services like NHS. This is because they are interested in maximising society surplus.
What is productive efficiency?
This is when a firm is producing at the lowest point of AC, so the firm is using the fewest possible resources to produce each good. The firm is producing at the minimum efficient scale, so it is fully utilising its economies of scale.
How can a firm be productively efficient?
They can do this by moving along the AC curve. If they are producing less than the minimum efficient scale, they should increase output to reach the MES.
If they are producing above the MES, they are experiencing diseconomies of scale and should reduce their output to move down the AC curve and reach the MES.
What is dynamic efficiency ?
This is when a firm invests its SNP’s into R&D to increase the productive potential of firms.
It is the improvement in allocative and productive efficiency over time, and this contrasts to static efficiency which is being efficient at a set time.
What is X-inefficiency?
This is when a firms fails to minimise AC at a given level of output. The characteristics are :
Higher Costs:
The firm is not using its resources in the most efficient way possible. It could be using more labour, capital, or materials than necessary to produce a given amount of output.
Lack of Competitive Pressure:
Firms that face little or no competition (such as monopolies or firms in oligopolies or public sector firms like TfL) may have less incentive to minimize costs because they do not have to compete with others for market share.
Organizational Slack:
This can occur due to inefficiencies in management or organizational structure. Employees may not be motivated to work efficiently, or management may fail to implement cost-cutting measures.
What is the result of X-inefficiency?
Higher Prices:
Due to higher costs, firms experiencing X-inefficiency may charge higher prices for their products. Consumers may face higher prices than they would if the firm operated more efficiently.
Reduced Profitability:
Even if a firm has some level of market power or monopoly power, X-inefficiency reduces profitability in the long term. Inefficient use of resources means the firm is not maximizing its potential profits.
Wasted Resources:
X-inefficiency leads to the waste of resources. If a firm is not using inputs (labour, capital, materials) efficiently, it is not maximizing output relative to the amount of input used.
