5.10 Market Structures, Static And Dynamic Efficiency, Resource Allocation

Question 1

What is static efficiency?

Answer 1

• describes the level of efficiency at one point in time.
• Productive and allocative efficiencies are examples of static efficiency.

Question 2

What is dynamic efficiency concerned with?

Answer 2

• is concerned with new technology and increases in productivity, which causes efficiency to increase over a period of time.

Question 3

What are the conditions required for productive efficiency?

Answer 3

• Productive efficiency occurs when firms minimise their average total costs.
• This is when firms produce at the lowest point on the average cost curve.
• MC = AC is a point of productive efficiency.
• All points on the PPF curve are productively efficient.

Question 4

What are the conditions required for allocatively efficiency?

Answer 4

• Allocative efficiency occurs when resources are distributed to the goods and services that consumers want.
• This maximises utility.
• It exists at P = MC, which means that consumers pay for the value of the marginal utility they derive from consuming the good or service.
• Free markets are considered to be allocatively efficient.

Question 5

What is dynamic efficiency influenced by?

Answer 5

• research and development
  -investment in human and non-human capital
• technological change

Question 6

What is dynamic efficiency?

Answer 6

• It is when all resources are allocated efficiently over time, and the rate of innovation is at the optimum level, which leads to falling long run average costs.
• The market is dynamically efficient if consumer needs and wants are met as time goes on.
• It is related to the rate of innovation, which might lead to lower costs of production in the future, or the creation of new products.

Question 7

What is dynamic efficiency affected by?

Answer 7

• short run factors such as demand, interest rates and past profitability.
• Short run costs might be increased in order to cause long run costs to fall.

Question 8

How can dynamic efficiency be evaluated?

Answer 8

• by considering the long time lag between making an investment and having falling average costs
• also by considering how factors change in the long run.
• Moreover, some firms will face a trade-off between giving their shareholders dividends and making an investment.

Question 9

What is x inefficiency?

Answer 9

• A firm is x-inefficient when it is producing within the AC boundary.
• Costs are higher than they would be with competition in the market.

Question 10

What causes x-inefficiency?

Answer 10

• This could be due to:

-organisational slack,
-a waste in the production process
-poor management
-or simply laziness.

• Monopolies tend to be x-inefficient, since they have little incentive to lower their average costs because of the lack of competition they face