Efficiencies Flashcards
At what point is Allocative Efficiency?
MC = AR (= P)
What is Allocative Efficiency?
When the value of the additional resources = the marginal benefit for consumers from this additional unit of output (welfare maximising)
What is MC>AR (allocative efficiency)
The resources used have value subtracted
- the additional unit of output costs more than consumers are willing to pay (over allocation, waste of scarce resources)
What is MC
The price consumers are willing to pay is less than the cost
- each unit is adding welfare, as you get to AR=MC, welfare continues to be added but by less each time (still welfare is rising)
At what point is Productive Efficiency?
ATC = MC (where ATC is minimised, which happens to be where it meets MC)
What is Productive Efficiency?
The level of output where ATC is minimised, the firm is using the fewest resources possible (per unit of output of output on average)
What is X-inefficiency?
Occurs when a lack of competition pressures result in an organisational slack
What is Organisational Slack?
Inefficiencies in terms of management/production decisions that don’t minimise costs
What is the principal-agent problem?
When agent makes decisions on behalf of principal they won’t always take into account the best interests of the firm.
What is Divorce of ownership?
The need for experts in specialist roles (legal experts, supply-chain, marketing-experts, scientists)
What are examples of the principal-agent problem?
- Shortcuts in decisions
- Riskier behaviour
- Long breaks
- Hire more workers than necessary
- Relaxing on rules/regulations
What is dynamic efficiency?
Changes in static efficiencies over time, normally derived from investment, which in turn result in innovation
What does a change in future productive efficiency mean?
If the firm invests in new production techniques (better capital), then the firm is likely to become more productively efficient over time
What does a change in future allocative efficiency?
Investment into new product development = increased quality products = increase welfare.
This could be seen as an improvement in allocative efficiency in the future as total welfare might increase as a result.
What does dynamic efficiency rely on? (2)
- Incentive to invest/innovate (competitive pressures)
- Ability to invest/innovate (Profits, borrow, investors, donors)
Are perfectly competitive markets allocatively efficient?
Yes, it is the only market where firms acting in their own self interest are allocatively efficient (MC = AR)
Are perfectly competitive markets productively efficient?
Yes, firms are price takers so can only work at the point where AC is minimised (ATC = MC)
Are perfectly competitive markets X-inefficient?
No, there is the highest degree of competitive pressures and no space for organisational slack
Are perfectly competitive markets Dynamically efficient?
Yes incentive to invest (can good be improved?)
but no ability to (can borrow)
Is a monopoly allocatively efficient?
No, firms want to profit max by putting Q at MC=MR
Is a monopoly productively efficient efficient?
It can be, depends on where the curves end up
Is a monopoly X-inefficient?
Could be since they are large firms and can often absorb the costs of organisational slack and there aren’t competitive pressures
Is a monopoly dynamically efficient?
Yes has the ability to invest
but not always the incentive (depending on the industry)
Is a monopolistic competition allocatively efficient?
No, in both LR and SR because there is some degree of price making ability
Is a monopolistic competition X-inefficient?
SR: scope for organisational slack (but dont want to erode into normal profits)
LR: No scope for organisational slack
Is a monopolistic competition dynamically efficient?
Incentive? Yes (to maintain SR supernormal profit)
Ability?
SR: got supernormal profits so yes
LR: normal profit so no
