4.1.5.10 Market structure, static efficiency, dynamic efficiency and resource allocation Flashcards
What is the difference between static efficiency and dynamic efficiency?
Static efficiency: Efficiency at a single point in time (includes productive and allocative efficiency).
Dynamic efficiency: Improvements over time via innovation, R&D, and technology, leading to falling LRAC.
What are the conditions for productive efficiency?
Firms produce at the lowest point on the AC curve (MC = AC).
All points on the PPF are productively efficient.
What are the conditions for allocative efficiency?
Price = Marginal Cost (P = MC).
Resources match consumer preferences to maximize utility.
What factors influence dynamic efficiency?
R&D, investment in human/non-human capital, and technological change.
Meeting changing consumer needs over time.
What is X-inefficiency, and why does it occur?
Producing above the AC curve due to waste, poor management, or lack of competition.
Common in monopolies (no incentive to minimize costs).
How do monopolies and perfect competition compare in efficiency?
Monopolies: May be dynamically efficient (profits fund R&D) but often X-inefficient.
Perfect competition: Statically efficient (P=MC, min AC) but lacks dynamic efficiency.
What trade-offs exist in achieving dynamic efficiency?
Short-run costs (e.g., R&D) vs. long-run benefits (lower LRAC).
Shareholder dividends vs. reinvestment for innovation.
How does competition affect efficiency?
Increases static efficiency (firms minimize costs).
May reduce dynamic efficiency if firms lack profits for R&D.
How is allocative efficiency shown on a diagram?
P = MC (demand curve intersects marginal cost curve).
How is productive efficiency shown on a diagram?
Lowest point on AC curve (where MC = AC).
Why might a monopoly be both inefficient and efficient?
Inefficient: X-inefficiency (higher costs).
Efficient: Dynamic efficiency (innovation funded by profits).
What are the limitations of dynamic efficiency?
Long time lags between investment and results.
Uncertainty over future demand/interest rates.
How does the PPF illustrate efficiency?
Points on the PPF: Productively efficient.
Point where MB = MC: Allocatively efficient.
