Efficiency Flashcards
What is efficiency in the context of market resource allocation?
Efficiency can be used to judge how well the market allocates resources and the relationship between scarce inputs and outputs.
Define allocative efficiency.
Allocative efficiency is achieved when resources are used to produce goods and services which consumers want and value most highly, maximising social welfare. It occurs when P=MC.
What does P=MC signify in allocative efficiency?
P=MC signifies that the value to society from consumption is equal to the marginal cost of production.
Define productive efficiency.
Productive efficiency occurs when products are produced at the lowest average cost, using the fewest resources to produce each product.
When does productive efficiency exist for a firm?
Productive efficiency exists when firms produce at the bottom of the AC curve, where MC=AC.
What is the relationship between technical efficiency and productive efficiency?
Technical efficiency is required for productive efficiency, as it involves producing a given output with minimum inputs.
Define dynamic efficiency.
Dynamic efficiency is achieved when resources are allocated efficiently over time, focusing on investment in new products and production techniques.
What is static efficiency?
Static efficiency refers to efficiency at a set point in time, with allocative and productive efficiency being examples.
What is required for dynamic efficiency in markets?
Dynamic efficiency requires competition to encourage innovation, along with differences in products and copyright/patent laws.
What is X-inefficiency?
X-inefficiency occurs when a firm fails to minimise its average costs at a given level of output, resulting in organisational slack.
How does X-inefficiency relate to productive inefficiency?
X-inefficiency is a specific type of productive inefficiency, occurring when firms do not minimise their costs for a specific output.
Provide an example of X-inefficiency.
If a firm produces 125 goods at a cost of £8 each instead of £7 each, it is X-inefficient.
What often causes X-inefficiency in firms?
X-inefficiency often occurs due to a lack of competition, giving firms little incentive to cut costs.
