8.5 Efficiency for Market Structures Flashcards
What is allocative efficiency?
Allocative efficiency occurs where P (AR) is equal to MC, where demand equals supply. It represents the maximizing of both consumer and producer surplus and results in resources being allocated according to consumer demand, high consumer choice, low prices, and excellent product quality.
What are the benefits of allocative efficiency for producers?
Producers benefit from being allocatively efficient by getting ahead of rivals who are not meeting consumer wants and needs, thus increasing their market share and potentially resulting in higher profits for the business.
What is productive efficiency?
Productive efficiency occurs at the lowest point of the average cost curve where MC=AC, at quantity Qp, and represents the exploitation of all possible economies of scale. It may result in lower prices for the consumer, higher levels of supernormal profit and increases in market share for the producer if economies of scale benefits translate into lower prices than rivals.
What is dynamic efficiency?
Dynamic efficiency occurs when supernormal profit is being made in the long run, and it can be reinvested back into the company in the form of technology advances, innovative new products, and R&D. This benefits consumers through the creation of new and better quality products over time, potentially lower prices, and increased choice. It also benefits producers by creating monopoly power, increasing profit-making potential, and increasing market share.
What is X efficiency?
X efficiency occurs when a firm is producing on the average cost curve at any given quantity level, minimizing unit costs at a production point, implying no waste in production. For highly competitive firms, being X-efficient is crucial to charge the lowest prices for consumers and increase consumer surplus. Lower average costs may also lead to higher levels of supernormal profit and increases in market share for the producer.
What is static efficiency?
Static efficiency occurs at one given point of production at one specific point in time, and it encompasses allocative efficiency, productive efficiency, and X efficiency.
What is the difference between static and dynamic efficiency?
Static efficiency occurs at a specific point in time, while dynamic efficiency occurs over time, with the condition that long-run supernormal profit is made and reinvested back into the company. Dynamic efficiency benefits both consumers and producers by creating new and better quality products, potentially lower prices, increased choice, and increased profit-making potential and market share for the producer.
