3.4.1- market structures

Question 1

Define efficiency?

Answer 1

efficiency can be used to judge how well the market allocates resources.

Question 2

Define allocative efficiency?

Answer 2

The resources are used to produce goods and services which consumers want. This means social welfare is maximized it will occur when P=MC so value of society is equal to marginal cost of production.

Question 3

define productive efficiency?

Answer 3

A firm has productive efficiency where the products are produced at the lowest average costs so the fewest resources are used to produce each product.

• minimum resources are used to produce maximum output
• MC=AC
• this will only happen when technical efficiency is achieved where given output is produced with minimum input

However, technical efficiency is where firms are not always productively efficient

Question 4

Define dynamic efficiency?

Answer 4

This happens when resources are allocated efficiently over time- the main objective is to bring investment-this will bring new innovative products.
-there has to be supernormal profit to provide firms with the incentive to invest.

Question 5

What is the opposite of dynamic efficiency

Answer 5

static efficiency

Question 6

Define x-inefficiency?

Answer 6

This is when the firm fails to minimize its average costs at a given level of output. If the firm is not producing at the lowest AC curve this will happen when there is a lack of competition so firms have little incentive to cut costs.