3.4.1 Efficiency

Question 1

Efficiency

Answer 1

The optimum best use of scarce resources to satisfy needs and wants

Question 2

Types of efficiencies

Answer 2

• allocative
• productive
• dynamic
• social

Question 3

Allocative efficiency

Answer 3

MC = AR (static/pareto): the value that consumers place on a product (market equilibrium) - the price that consumers are willing and able to pay, is the same as the firms’ willingness to supply (marginal COP)

Question 4

Productive efficiency

Answer 4

MC = AC (can be static): a firm producing goods at the lowest possible average unit cost, with the lowest waste of inefficiencies (most output with their given inputs)

Question 5

Dynamic efficiency

Answer 5

MC = MR: the adaptation/improvement of products/production processes over time - firms could re-invest its profit and become dynamically efficient

Question 6

Dynamic efficiency evaluation

Answer 6

The supernormal profits made may be used to pay shareholders dividends or share buy-backs (no re-investment)