Business efficiency

Question 1

Allocative efficiency

Answer 1

• Where resources follow consumer demand
• Where society surplus is maximised
• Where net social benefit is maximised

where D=S MSB = MSC
P=MC, so AR = MC

Question 2

Productive efficiency

Answer 2

• Where firm is operating at the lowest point on their AC curve
• Full exploitation of economies of scale
• At lowest point of AC curve

Question 3

X efficiency:

Answer 3

• Minimising waste
• Production on the AC curve
• Firm may not be large enough to produce on lowest point of AC curve, so will produce at ‘a’, but an x inefficient firm would produce at ‘b’

Question 4

examples of X inefficiency

Answer 4

• Eg, monopolies might allow x inefficiency, as they originally were lazy, but afterwards it is very hard to bring this down, as it may involve things such as bringing wages down
• Eg, public sector firms which are not profit motivated

Question 5

static efficiency =

Answer 5

allocative + productive + x

occur at one specific production point

Question 6

dynamic efficiency - Joseph Schumpeter

Answer 6

• Reinvestment of LR supernormal profit
• To obtain supernormal profit, produce at MC = MR
• At this level of output, revenue is above costs, so a supernormal profit of RabC is made.