3.4.1 Efficiency Flashcards
What is meant by productive efficiency ?
A firm is productively efficient when they produce at lowest ATC.
What is meant by allocative efficiency?
When a firm produces where price = marginal cost
What is meant by dynamic efficiency?
Dynamic efficiency is 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 is only dynamically efficient if they are making supernormal profits in the LR and using them to:
- Invest in R & D into capital improvement (reducing AC)
- Investing into improving production processes (reducing AC)
- Investing into new products and services (productive efficiency)
Compare efficiency between perfectly competitive firms and those in concentrated markets
Firms in perfect competition will be allocatively (SR too) and productively efficient in the LR and won’t be dynamically efficient. It will also not have any X-inefficiency.
However, firms in a concentrated market (monopoly) will not be productively or allocatively efficient at all. They will be dynamically efficient as they have the supernormal profits to do so. Furthermore, due to low contestability, they will be X-inefficient.
What is meant by X-inefficiency?
This is sometimes known as ‘organisational slack’ and is when a firm is not producing on its lowest ATC curve.
- This could be because managers have different objectives and enjoy running a larger firm than is efficient (bragging rights).
What are the conditions that make it more likely for x-inefficiency to exist?
If there are high barriers to entry or low contestability. If these firms do not feel the threat of other competition then there is no need for them to be efficient.
X-inefficiency will only be possible in imperfect competition.
