Efficiency

Question 1

Define productive efficiency

Answer 1

Productive efficiency is my business is a producing the goods as cheaply as possible. I.e., the lowest point of the average total cost curve

Question 2

Which businesses would we expect to produce at productive efficiency?

Answer 2

Generally, we would expect that there is business is facing the most competition would be more likely to produce or achieve this I.e. Producing as cheap as possible as they are under the most pressure.

Question 3

Define allocative efficiency

Answer 3

Allocative efficiency is where businesses produce exactly those goods that people want to buy at the price consumers are willing to pay.

Customers are paying exactly equal costs to the cost of producing the good.

This will occur when businesses are producing up to the point where the cost of the last good that they made is equal to the price of their consumers have to pay for the good.

Question 4

What are the two options of allocative efficiency?

Answer 4

1. Price taker - Prices constant so marginal revenue will be constant. Allocative efficiency will be produced where price is equal to the cost.
2. Downward sloping demand curve. (Assuming profit maximisation). We would only expect businesses to achieve allocative efficiency if under a lot of competition, and instead they will produce where MR = MC instead of MC = AR.

Question 5

Define dynamic efficiency

Answer 5

Dynamic efficiency is where businesses are constantly improving their products and the methods of production. Because of this overtime everything they do is getting better.

Question 6

With who would we expect to achieve dynamic efficiency

Answer 6

We might expect large firms to tend to do this, to make supernormal profits. Therefore, they can afford to spend lots of money on R&D. Because of this they can keep improving their products (innovation). For example, apple.

Question 7

Define Pareto Efficiency

Answer 7

The other three types of efficiency relate to business however proficiency relates to the economy as a whole.

It occurs when the economy is using all of its resources e.g. operating on its production possibility frontier, and therefore it is not possible to make any individual person better off without making somebody else worse off.