Efficiency Flashcards
What is efficiency?
How well we use inputs to achieve outputs. Efficiency is achieved when inputs are minimised but outputs are maximised
What are the 3 main outcomes that we want from markets and what efficiency corresponds to each?
1) we want demands to be met, allocative efficiency
2) we want prices to be low, productive efficiency
3) we want improvements in products in the future, dynamic efficiency
What is static efficiency and in what ways can it be analysed?
An analysis of efficiency in a given moment in time. It can be analysed by: consumer and producer surplus, allocative efficiency, and productive efficiency
How does consumer and producer surplus relate to efficiency and what is deadweight loss?
It shows the benefit of the market for producers and consumers, so efficiency is achieved when they are maximised. When it is not maximised this is called deadweight loss
Where is allocative efficiency on a diagram and what does it mean?
Allocative efficiency = AR = MC
or supply = demand
Allocative efficiency considers how well firms use their inputs to meet consumer demands, therefore it shows firms using scarce factors of production to create what we need and want
Where is productive efficiency on the diagram and what does it mean?
Productive efficiency = AC = MC or any point on the PPF
Productive efficiency considers how well firms use inputs to produce goods and services. It leads to low cost per unit so also low prices
What is dynamic efficiency, what are the two main benefits of this?
This is improvements over time. This requires investment. The two main benefits are: product improvement and cheaper costs of production in the future
What does the firm need to be dynamically efficient?
Firms need supernormal profit (AR>AC) so that it can invest to be dynamically efficient, also ideally have competition to incentivise them to invest
