3.4.1 Efficiency

Question 1

What are the 4 types of efficiency ?

Answer 1

1) productive efficiency
2) allocative efficiency
3) X-efficiency
4) dynamic efficiency

Question 2

What can economists use types of efficiency to find out ?

Answer 2

Whether it is good for society or not

Question 3

What is productive efficiency ?

Answer 3

This is when average cost is at its lowest points. MC=AC

Question 4

What is allocative efficiency ?

Answer 4

This is where welfare is maximised and society is happy. This is where MC is equal to price. the cost to producers for producing good matches price consumers are willing to pay.

MC equal to price, same as equal to AR same as equal to demand !

Question 5

What is X - inefficiency ? and how do we show it

Answer 5

A firm is producing above its average cost curve for a given level of output.
We can show x inefficiency as the gap between the firm AC curve and their actual AC

Question 6

What is dynamic efficiency ?

Answer 6

This is how changing technology improves a firm’s output potential over time

Question 7

How can a company achieve dynamic efficiency ?

Answer 7

They can achieve this through research and development. In order to invest into R and D firms need to make supernormal profit. Enough to be available for investment