Efficiency Flashcards
What is allocative efficiency?
when no one can be made better off without making someone else worse off. Also known as Pareto efficiency/optimality
What is economic efficiency?
Efficiency is about a society making optimal (best) use of our scarce resources to help satisfy changing wants & needs.
When does allocative efficiency occur?
Allocative efficiency occurs when the value that consumers place on a product (reflected in the price they are willing and able to pay) equals the marginal cost of factor resources used up in production
What is the market condition required for allocative efficiency?
Condition required for allocative efficiency in a market is that price = marginal cost of supply (P = MC); on a diagram this is where AR = MC
Explain allocative efficiency in a competitive market
Up to output Q, the price consumers are willing to pay (shown by the demand curve) is higher than the cost of the scarce resources used to produce the good (shown by the supply curve), so it is efficient to allocate scarce resources to produce these units
For output units beyond Q this is no longer the case.
In a competitive market, social welfare (consumer surplus + producer surplus) is maximised at when the equilibrium quantity is produced
What is productive efficiency?
when a firm is producing goods or services at the lowest possible average cost, using the fewest possible resources.
*Firm produces the maximum output with the given inputs, without any waste or inefficiencies.
What output is productive efficiency achieved?
Productive efficiency is achieved at an output that minimises the unit cost (AC) of production
What is X-inefficiency?
When a firm is not operating at its optimal level of efficiency due to internal factors such as poor management, lack of motivation, and bureaucratic inefficiencies.
Describe how this diagram shows productive efficiency and X-inefficiency
Productive efficiency is achieved at output Q because the firm is operating at its minimum LRAC (at A or cost per unit C1)
If the firm faced average costs at C2 when its output was Q, it would be X-inefficient
What is dynamic efficiency?
achieving efficiency over time; it refers to ongoing innovation of products and production techniques and is all about long-term growth and development
What is product innovation?
when companies invest in R&D and introduce new products or services to increase their competitive advantage, reduce costs, and improve the quality of their offerings.
What is process innovation?
the improvement of existing processes or the development of new ones to increase efficiency and productivity e.g. automation
What is creative destruction?
Schumpeter’s concept that states that innovation and technological change lead to the replacement of old technologies and products with new ones, leading to economic growth and progress
What is static efficiency?
the optimal allocation of resources at a specific point in time;optimising existing resources and processes, focused on efficiency and cost reductions
