3.4.1 - efficiency

Question 1

allocative efficiency

Answer 1

this achieved when resources are used to produce goods and services at a quantity which is the same as the supply and demand market equilibrium, at MC=AR

Question 2

productive efficiency

Answer 2

a firm is productively efficient when its products are produced at the lowest average cost so the fewest resources are used to produce each product, in the short run this is only possible where AC=MC

Question 3

dynamic efficiency

Answer 3

this is where firms invest and introduce new products and production processes which can increase the quality of goods or lower costs as new capital is more efficient, requires supernormal profits.

supernormal profits are proportional to the amount of dynamic efficiency potential

Question 4

x inefficiency

Answer 4

this is where firms aren’t producing at a quantity which is the lowest point on the AC curve so therefore if they produce at a different quantity they still could be producing for less, the difference is the x inefficiency

typically occurs where there is a lack of competition so firms have little incentives to cut costs

Question 5

Efficiency/inefficiency in different market structures

Answer 5

perfect competition - allocative and productive efficiency is typically reached because firms are price takers and have no market power so resources are allocated efficiently and produced at minimum cost

monopoly - monopolies that operate at a quantity that is not at AR=MC they are allocatively inefficient and most monopolies profit maximise, however monopolies can be productively efficient if they choose to minimise costs to seek greater profits

monopolistic competition - in this market structure firms may not reach allocative efficiency as they have some degree of market power, but they compete on product differentiation. Productive efficiency may not be fully realized either, as firms may operate at less than minimum average cost due to product differentiation.

Oligopoly - Oligopolistic firms can engage in price competition, leading to allocative inefficiency. However, they may invest in research and development, contributing to dynamic efficiency. Whether productive efficiency is achieved depends on the specific industry

Mixed or Regulated Markets - In some industries, governments may intervene to promote allocative and productive efficiency through regulations, subsidies, or antitrust policies