Efficiency

Question 1

Allocative Efficiency

Answer 1

Where resources follow consumer demand
Where net social benefits are maximised
Where society surplus is maximised

Question 2

Formula for allocative efficiency

Answer 2

MSB = MSC
Supply = Demand 
Demand = Average Revenue = Price
Supply = Marginal Costs

Therefore
MC = P is allocative efficiency

Question 3

Productive Efficiency

Answer 3

Firm is producing at lowest point of Average Cost curve and utilising all economies of scale

Question 4

X Efficiency

Answer 4

When firm minimises waste and has no excess costs. This is a point ABOVE the AC curve

Question 5

Why can firms be X inefficient?

Answer 5

Monopolies can become complacent as they have no competition or incentive to be efficient. Public sector firms have no profit drive, X inefficiency will creep in.

Question 6

How can X efficiency be reduced?

Answer 6

Reduce wages
Get rid of staff perks

However as solution is so unpopular, firms will allow the excess costs.

Question 7

Dynamic Efficiency

Answer 7

Reinvestment of long run supernormal profit

Question 8

Methods of dynamic efficiency

Answer 8

New capital
R&D
New technology

Question 9

Where is dynamic efficiency on a graph?

Answer 9

Revenue * Quantity = Supernormal Profit

R = AR - AC

Question 10

LR supernormal profit…

Answer 10

is needed for legit dynamic efficiency

Question 11

Static Efficiency

Answer 11

Allocative, Productive and X efficiency. This is because they all occur at ONE specific point.