5.11 Business efficiency Flashcards
what are the 4 types of efficiency?
allocative efficiency
productive efficiency
x efficiency
dynamic efficiency
definition of allocative efficency
when it is impossible to improve overall economic welfare by reallocating resources between markets
what are 3 ways in which allocative efficiency can occur?
when resources follow consumer demand
where society surplus is maximised
where net social benefit is maximised
where is allocative efficiency on a business diagram
where avergae revenue (price) is equal to marginal costs (where supply equals demand)
when does productive efficiency occur?
when a firm is operating at the lowest point of their average cost curve by fully exploiting all their economies of scale
what is X efficiency
when a business is minimising their waste (no excess costs)
what is productive efficiency for an economy
for economy when it is impossible to produce more of one good without producing less of another good
where does x efficiency occur
when production takes place on the average cost curve
in what market structures does/ could x inefficiency occur?
monopolies as they lack competitive drive so become complacent + to reduce tricky and undesirable (e.g. reduce wages) so easier to allow it to continue
public sector firms as they don’t profit maximise and social welfare is their objective so x inefficiency could creep in.
what is dynamic efficiency?
the reinvestment of long run supernormal profit back into the business e.g. new capital r and d etc.
only possible if LONG run supernormal profit is able to be made.
what is static efficiency
static efficiency consists of productive, allocative and x efficiency, all efficiency that occur at one specific production point.
why is allocative efficiency good for consumers?
resources follow consumer demand (what they want and quantity they want)
low prices ( consumer surplus is maximised)
high choice (desired)
high quality of production due to competitive outcomes
why is allocative efficiency good for the producer?
retain/ increase market share
staying ahead of their rivals
increase profit by brining more consumers
why is productive efficiency good for the consumer
lower prices as lower average cost for producers may be passed on in the form of lower prices
high consumer surplus
full exploitation of economies of scale
why is productive efficiency good for the producer
more production at a lower cost (lowest point of AC curve)
higher profit
lower prices mean stay ahead of rivals due to higher market share
