3.4.1 - Efficiency Flashcards
What Are The 4 Business Efficiencies?
~ Allocative efficiency (AE).
~ Productive efficiency (PE).
~ Dynamic Efficiency (DE).
~ X-efficiency / X-inefficiency.
Describe Allocative Efficiency
(4 Points)
~ Where resources follow consumer demand and needs.
~ Where society surplus (Sum of consumer and producer surplus) is maximised.
~ Where net social benefits is maximised.
~ Occurs where D=S, MSB=MSC and P(AR)=MC.
What Does It Mean For A Consumer If A Business Is Being Allocatively Efficient?
(4 Points)
~ Resources are following consumer demand, consumers are getting exactly what they want at the right quantity.
~ Low prices for consumers, maximising consumer surplus.
~ High choice for consumers
~ High quality, for firms to stay ahead of their rivals.
What Does It Mean For Producers To Be Allocatively Efficient?
(2 Points)
~ Retain or increase market share, and stay ahead of their rivals.
~ Increase their profit and bring consumers to them, as a result of the benefits for consumers.
Describe Productive Efficiency
(4 Points)
~ When a firm is operating at the lowest point on their AC curve.
~ Minimising their costs by fully exploiting all potential EOS.
~ There is no wastage of scarce resources.
~ Occurs where MC=AC.
What Does It Mean For A Consumer If A Business Is Being Productively Efficient?
(2 Points)
~ Lower prices, as a result of the lower AC being based on to them, leading to higher consumer surplus.
~ Full exploitation of EOS, can decrease quality for consumers.
What Does It Mean For Producers To Be Productively Efficient?
(3 Points)
~ More production and lower cost.
~ Translating into higher profits.
~ Lower prices means more customer, leading to greater market share and retention of market share, good for LT position in the industry.
Describe X-Efficiency
(5 Points)
X-Efficiency:
~ When a business is minimising their waste, there are no excess costs.
~ Occurs when production takes place on any point of the AC curve, Point A at C1.
X-Inefficiency:
~ Production would take place above their AC curve. Point B at C2.
~ Often occurs when there is a lack of competition (Monopolists) where there is little incentive to cut costs.
~ Difference between points A+B is the
x-inefficiency, where there are excess costs as waste creeps in.
What Does It Mean For A Consumer If A Business Is Being X-Efficient?
(2 Points)
~ Lower prices, due to lower costs.
~ Leads to higher consumer surplus.
What Does It Mean For Producers To Be
X-Efficient?
(4 Points)
~ Lower costs, passed on to consumers to increase or retain their market share.
~ Higher profit.
Describe Dynamic Efficiency
(3 Points)
~ Re-investment of LR supernormal profits back into the business, in the form of new and upgraded capital, new technology, innovation and R+D.
~ There needs to be LR supernormal profit, to finance this re-investment.
~ Occurs overtime.
What Does It Mean For A Consumer If A Business Is Being Dynamically Efficient?
(5 Points)
~ From reinvestment, there is greater innovation.
~ Lower prices over time, due to new technology, production techniques and new machinery these lower AC, transferring over in lower prices.
~ New innovation over time means, new producers entering the market increasing competition and driving down prices.
~ Leading to higher consumer surplus.
~ Can reduce competition.
What Does It Mean For Producers To Be Dynamically Efficient?
(4 Points)
~ Allows for LR profit maximisation, as firms continually look to innovate and spreading on R+D staying ahead of rivals and keeping high profits.
~ Lower costs over time, improving efficiency and profit margins.
~ Retain and increase market share.
~ Stay ahead of competition, to access patents preventing copying of products and gain monopoly power.
What Is Meant By Static Efficiency?
(2 Points)
~ Consists of AE, PE and XE.
~ They all occur at one specific production point.
