3.4.1 Efficiency Flashcards
1
Q
What is productive efficiency?
A
- occurs when firms have chosen appropriate combinations of factors of production + produce the maximum output possible from those outputs
- therefore producing at minimum long run average costs
2
Q
When does productive efficiency occur?
A
- at the level of output where marginal costs = average costs
- MC =AC
3
Q
What is allocative efficiency?
A
- when producers produce what consumers want = resources are allocated in a way that consumers + producers get maximum possible benefit
- there is no excess demand or supply
4
Q
When does allocative efficiency occur?
A
- level of output where average revenue = marginal costs
- AR = MC
5
Q
What is dynamic efficiency?
A
- long-term efficiency is a result of innovation as a firm reinvests its profits
- it results in improvements to manufacturing methods
- this lowers both short run + long run average total costs
6
Q
What is X-inefficiency?
A
- occurs when a firm lacks the incentive to minimise average costs
- this is due to a lack of competition, meaning firms are not incentivised to be efficient
7
Q
Efficiency in perfect competition
A
- the firm produces at profit maximisation (MC=MR)
- the firm is productively efficient as MC=ATC at this level of output
- the firm is allocatively efficient as AR=MC
- the firm is unlikely to experience dynamic efficiency as it is unlikely to have supernormal profits to reinvest
8
Q
Imperfect competition/monoply efficiency
A
- the firm produces at the profit max. (MC=MR)
- the firm is not productively effienct as ATC>MC at this level of output
- the firm is not allocatively efficient to as AR>MC
- the firm is likely to experience dynamic efficiency as it will be able to reinvest its profits to increase innovation
9
Q
What is static efficiency?
A
- measuring efficiency at a point in time
- can describe allocative + productive efficiency for an imperfect
