3.4.1 Efficiency

Question 1

Efficiency definition?

Answer 1

Concerned with the relationship between scarce inputs and outputs

Question 2

Productive efficiency?

Answer 2

Firm is operating at lowest point on AC curve

(Exploiting EoS)

Question 3

Allocative efficiency?

Answer 3

Uses supply and demand to allocate resources in a way to produce a balance of goods and services that matches consumer preferences

(When AR = MC)

Question 4

X-inefficiency?

Answer 4

When AC is higher than lowest possible for a given level of output i.e. firm is operating above its AC curve

Question 5

Why might a firm be X-inefficient?

Answer 5

• Lack of organisation
• Waste in production process
• If they’re a monopoly, less competition = less incentive to lower average costs

Question 6

Dynamic efficiency

Answer 6

All resources are allocated efficiently over time (investment into R+D for greater efficiency in the LR)

Question 7

Static vs Dynamic effiency?

Answer 7

Static: Allocative, Productive + X-inefficiencies (occurs at one specific production point)

Dynamic: occurs over time