3.4.1 Efficiency

Question 1

Productive efficiency

Answer 1

Producing the maximum output of goods/services at the lowest cost.

Question 2

Allocative efficiency

Answer 2

Resources are allocated in a way which maximises consumer utility (satisfaction).

Question 3

Dynamic efficiency

Answer 3

Resources are allocated efficiency over a period of time.

Question 4

X-inefficiency

Answer 4

Where firms are not operating at the lowest possible costs.

Question 5

Static efficiency

Answer 5

Resources are allocated efficiency at a particular period of time.

Question 6

Where does productive efficiency occur?

Answer 6

Where marginal costs = average costs

MC = AC

Question 7

Where is productive efficiency shown on a diagram?

Answer 7

The lowest point of the AC curve.

Question 8

What would we expect to see at productive efficiency?

Answer 8

Average costs are minimised.

There is no wastage of scarce resources and a high level of productivity.

Question 9

Where does allocative efficiency occur?

Answer 9

Where Average Revenue = Marginal Cost

AR = MC

Question 10

Where is allocative efficiency shown on the diagram?

Answer 10

At equilibrium between AR and MC

Question 11

What would we expect to see with allocative efficiency?

Answer 11

Consumers receive what they want, as the price they want and at the correct quantity – meaning there is no excess in demand or supply.

Question 12

Dynamic efficiency shown on a diagram

Answer 12

Question 13

What might dynamic efficiency cause?

Answer 13

It results in improvements to manufacturing methods (innovation) , which lowers the short-run and long-run average costs.

Question 14

What is the most common reason why dynamic efficiency happens?

Answer 14

Innovation, as firms reinvest their profits.

Question 15

What is x-inefficiency also known as?

Answer 15

Organisational slack

Question 16

When does x-inefficiency occur?

Answer 16

When a firm lacks the incentive to control production costs.

It often occurs due to a lack of competition in industry or in a firm that has no consequences for making a loss (e.g. some government owned companies).

Question 17

What are market structures?

Answer 17

The characteristics of the market in which a firm or industry operates in.

Question 18

What can market structures be seperated into?

Answer 18

• Perfect Competition
• Imperfect Competition

Question 19

What are the three types of imperfect competition?

Answer 19

• Monopolistic
• Oligopoly
• Monopoly

Question 20

Imperfect competition

Answer 20

Market structures where firms have some market power and can influence prices.

i.e. monopolistic, oligopoly and monopoly

Question 21

Perfect competition

Answer 21

A market structure in which individual firms have no market power due to the amount of competition and are unable to influence price in a market.

Question 22

Monopolistic competition

Answer 22

A market structure in which there are many firms offering a similar product but with some product differentiation.
e.g. Chinese takeaways, hairdressers

Question 23

Oligopoly

Answer 23

A market structure in which a few large firms dominate the industry with each firm having significant market power.

Question 24

Monopoly

Answer 24

A market structure where there is a single supplier of a particular product and has the power to influence the market supply and price.

Question 25

Diagram showing imperfect competition

Answer 25

The firm produces at the profit maximisation level of output where MC = MR.
The firm is not productively efficient as AC > MR at this level of output.
The firm is not allocatively efficient as AR (P) > MC
The firm is likely to experience dynamic efficiency as it will be able to reinvest its profits so as to increase innovation.

Question 26

Diagram showing perfect competition

Answer 26

The firm produces at the profit maximisation level of output where MC = MR.
The firm is productively efficient as MC = AC at this level of output.
The firm is allocatively efficient as AR (P) = MC
The firm is unlikely to experience dynamic efficiency as it is unlikely to have supernormal profits to reinvest.