3.4.1 Efficiency Flashcards
Productive efficiency
Producing the maximum output of goods/services at the lowest cost.
Allocative efficiency
Resources are allocated in a way which maximises consumer utility (satisfaction).
Dynamic efficiency
Resources are allocated efficiency over a period of time.
X-inefficiency
Where firms are not operating at the lowest possible costs.
Static efficiency
Resources are allocated efficiency at a particular period of time.
Where does productive efficiency occur?
Where marginal costs = average costs
MC = AC
Where is productive efficiency shown on a diagram?
The lowest point of the AC curve.
What would we expect to see at productive efficiency?
Average costs are minimised.
There is no wastage of scarce resources and a high level of productivity.
Where does allocative efficiency occur?
Where Average Revenue = Marginal Cost
AR = MC
Where is allocative efficiency shown on the diagram?
At equilibrium between AR and MC
What would we expect to see with allocative efficiency?
Consumers receive what they want, as the price they want and at the correct quantity – meaning there is no excess in demand or supply.
Dynamic efficiency shown on a diagram
What might dynamic efficiency cause?
It results in improvements to manufacturing methods (innovation) , which lowers the short-run and long-run average costs.
What is the most common reason why dynamic efficiency happens?
Innovation, as firms reinvest their profits.
What is x-inefficiency also known as?
Organisational slack
When does x-inefficiency occur?
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).
What are market structures?
The characteristics of the market in which a firm or industry operates in.
What can market structures be seperated into?
- Perfect Competition
- Imperfect Competition
What are the three types of imperfect competition?
- Monopolistic
- Oligopoly
- Monopoly
Imperfect competition
Market structures where firms have some market power and can influence prices.
i.e. monopolistic, oligopoly and monopoly
Perfect competition
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.
Monopolistic competition
A market structure in which there are many firms offering a similar product but with some product differentiation.
e.g. Chinese takeaways, hairdressers
Oligopoly
A market structure in which a few large firms dominate the industry with each firm having significant market power.
Monopoly
A market structure where there is a single supplier of a particular product and has the power to influence the market supply and price.
Diagram showing imperfect competition
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.
Diagram showing perfect competition
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.
