5. Productive And Allocative Efficiency

Question 1

Productive efficiency

Answer 1

Attained when a firm operates at minimum average total cost, choosing an appropriate combination of inputs (cost efficiency) and producing the maximum output possible from those inputs (technical efficiency)

Question 2

Allocative efficiency

Answer 2

Achieved when consumer satisfaction is maximised

Question 3

Economic efficiency

Answer 3

A situation in which both productive efficiency and allocative efficiency have been reached

Question 4

Total costs

Answer 4

The sum of all costs that are incurred in producing a given level of output

Question 5

Fixed costs

Answer 5

Costs incurred by a firm that do not vary with the level of output

Question 6

Variable costs

Answer 6

Costs that vary with the level of output

Question 7

Average total costs

Answer 7

Total cost divided by the quantity produced

Question 8

Marginal costs

Answer 8

The cost of producing an additional unit of output

Question 9

Economies of scale

Answer 9

Occur in a firm when an increase in the scale of production leads to production at lower long run average cost

Question 10

Internal economies of scale

Answer 10

Economies of scale that arise for. The expansion of a firm

Question 11

External economies of scale

Answer 11

Economies of scale that arose form expansion of the industry in which a firm is operating

Question 12

DISeconomies of scale

Answer 12

Arise where their are higher average costs incurred at higher levels of output

Question 13

Internal diseconomies of scale

Answer 13

DISeconomies of scale that arise from the expansion of a firm

Question 14

External DISeconomies of scale

Answer 14

DISeconomies of scale that arise from the expansions of the industry in which the firm is operating

Question 15

Benefits of internal economies of scale

Answer 15

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Risk bearing: large firms spread risk over large # of investors. This means despite volatility in the market risks faced by investors can be reduced.

Financial economies: the larger the output the larger the business. Banks view reputability convincing lower rates if he cost of borrowing.

Marketing economies: the larger the firm the more it can spread its marketing budget over a larger range of output. LRAC fall

Technical economies: buying auspicious machinery for more efficient production, or specialising labour. Production rises, marginal costs fall. LRAC fall

Managerial economies: employing specialist managers to improve productivity and efficiency within each sector

Purchasing economies: the bigger the firm the better the ability to negotiate low price because of reputability and success (when buying in bulk)

Question 16

Benefits of external economies of scale

Answer 16

Industry grows - firms cluster together

• lower raw material costs
• lower training costs

Question 17

DISeconomies of scale costs

Answer 17

Control problems: principle worker problem monitoring employees. Efficiency is hard to regulate = costs are higher

Communication problems: time consuming for managers to communicate with a large amount tif workers, and for employees to communicate with all hierarchy’s within a large business. This is time consuming

Motivation problems- in the grand scale of things workers may feel insignificant/ worthless, caking motivation, and in turn productivity to fall

Question 18

Economies of scale evaluation

Answer 18

Weather a firm/industry experience dis/economies of scale is dependant on the leek of output.

minimum efficient scale represents where a firm can fully exploit eos.

Before this,experienced is economies of scale. After MES is met costs are maintained, followed by DISeconomies of scale (where long run aggregate costs start to rise)

If a firm has high levels of fixed costs (relative to variable costs) then to reach DISeconomies of scale