3.4.1 Efficiency

Question 1

Allocative efficiency

Answer 1

This is achieved when resources are used to produce goods
and services which consumers want and value most highly and social welfare is maximised. P=MC

Question 2

Productive efficiency

Answer 2

A firm has productive efficiency when its products are
produced at the lowest average cost so the fewest resources are used to produce each product. MC=AC

Question 3

Dynamic efficiency

Answer 3

This is achieved when resources are allocated efficiently over
time. It is caused by a firm earning supernormal profit which it then reinvests back into the business.

Question 4

X-inefficiency

Answer 4

Little incentive to lower average costs because of lack of competition. Costs are higher that they would be in a competitive market.