3.4.1 Efficiency Flashcards
What is allocative efficiency?
This occurs when goods and services produced match consumer’s needs and preferences. Social welfare is maximised.
Where does allocative efficiency occur?
P = MC, occurs when value to society from consumption is equal to the marginal cost of production
What is productive efficiency?
Output is produced at lowest possible average costs. Minimum resources are used to produce maximum output levels.
Where does productive efficiency occur in the short run?
Occurs when output is at the lowest point on the SR AC curve
Where does productive efficiency occur in the long run?
The lowest point on the firm’s LRAC curve, at the scale that minimised unit costs.
What is dynamic efficiency?
Results from improvements in technical and productive efficiency over time. A dynamic economy improves methods of production of existing products. This impacts technical progress of the economy, improving quality of FOPs available, brought about by investment.
What is X-inefficiency?
Occurs when the firm incurs unnecessary production costs, during a particular sale of fixed capacity/any level of production. This is caused by combining FOPs in a technically inefficient way to produce output, or paying employees unnecessarily high wages.
When is a firm X-efficient?
When they produce a given output and have eliminated all unnecessary production costs.
Where does X-inefficiency occur?
It it produces output at a cost higher than average total costs. If it produces on the average total cost curve, it is x-efficient.
What is static efficiency?
Efficiency at a set point in time eg. productive efficiency, allocative efficiency, X-inefficiency
What is the economic efficiency like for perfect competition?
High efficiency - they are productively and allocatively efficient
What is the economic efficiency like for monopolistic competition?
There is no efficiency in theory, however it may be allocatively efficient to some extent as differentiated products are desirable for consumers
What is economic efficiency like for oligopolies?
Low allocative efficiency but there is innovation and economies of scale - high dynamic efficiency.
What is economic efficiency like for monopolies?
Low allocative efficiency but there are economies of scale and reinvested profits. Risk of X-inefficiency due to lack of competition from other firms.
What is economic efficiency like for contestable markets?
High efficiency level - depends on strength of contestability in the market.
