Efficiency Flashcards
Define Allocative Efficiency
When firms are producing goods and services where resources perfectly follow consumer demand, maximsing society surplus
Condition : P = MC / MC = AR
Define Productive Efficiency
When a firm is operating at the lowest point of their AC curve, with full exploitation of economies of scale
Define X-Efficiency
When firms produce on their AC curve to minimise wastage
Define Dynamic Efficiency
When firms reinvest LR supernormal profits into advancements. The idea is to lower LRACs over time.
Condition = MC = MR, Profit Max
What are the Benefits of Allocative Efficiency For a Consumer?
- Resources perfectly follow consumer demand
- Increased availability of choice
- Quality is implied due to competition
- Lower prices are passed onto consumers
- Consumer surplus is maximised
What are the Benefits of Allocative Efficiency for a Producer?
- More consumers are attracted to the lower prices
- This retains / increases market share
- Profitability increases and firms stay ahead of rivals
What are the Benefts of Productive Efficiency for a Consumer?
- Firms pass on lower AC in terms of lower prices and exploitation of economies of scale
- Consumer surplus is increased
What are the Benefts of Productive Efficiency for a Producer?
- Exploiting economies of scale allows lower production costs due to increased output and growth
- This leaves more contribution towards profits
- Market share and competitveness increases
What are the Benefts of X-Efficiency for a Consumer?
- Firms minimise waste, which lowers ACs
- This is passed on as lower prices
- Consumer surplus is maximised
What are the Benefts of X-Efficiency for a Producer?
- Minimsing waste leads to lower production costs
- Lower production costs increases profit margins
- Consumers are likely to buy from a efficienct firm
- Market share increases as profitability increases
- Firms stay ahead of competition
What are the Benefts of Dynamic Efficiency for a Consumer?
- Reinvestment of LR SNP brings in new innovation, technological advancements and products for consumer
- This increases quality and choice as competition is attracted to enter a thriving market
- Lower LRAC over time as supply increases
- Lower costs of production lead to lower prices
- Consumer surplus increases
What are the Benefts of Dynamic Efficiency for a Producer?
- Can allow LR Profits to be sustained overtime through advancements
- LRAC reduce over time, increasing competitiveness
- Firms stay ahead of rivals
- Firms increase their market share
- Firms may be able to gain patents/copyrights to fence competition
