Efficiency (3.4.1) Flashcards
What is Efficiency?
Refers to the optimal use of resources to achieve the desired outcomes with the least amount of waste, effort, or cost. It’s a measure of how well resources (such as time, money, labor, and materials) are utilized to produce goods or services.
What can efficiency be used to judge?
How well the market allocates resources and the relationship between scarce inputs and outputs
What are the four types of efficiency?
- Allocative Efficiency
- Productive Efficiency
- Dynamic Efficiency
- X- inefficiency
What is Allocative Efficiency?
-Ensures that the right amount of each good or service is being produced and consumed, meaning that society is getting the most benefit from its available resources.
-Occurs at the level of output where AR=MC
-Resources are allocated in a way that consumers and producers receive max possible benefit
-No one can be made better off without making someone else worse off
-NO EXCESS demand or supply
What is Productive Efficiency?
-Occurs at level of output where MC=AC
-Average costs are minimised and there is no wastage of scarce resources and there is a high level of factor productivity
-Occurs when an economy or a firm is producing goods and services at the lowest possible cost.
-Achieved when the production process uses the fewest resources to create the maximum possible output.
-In other words, productive efficiency means that resources (labor, capital, etc.) are being utilized in the most efficient way, with no waste.
What is Dynamic Efficiency?
-Long-Term efficiency as a result of innovation as firm reinvests profits
-Results in improvements to manufacturing methods which lowers both SR + LR ATC
-Ability of an economy, firm, or market to improve over time by adapting, innovating, and increasing productivity.
-Involves making investments in new technologies, products, or processes that allow for long-term improvements in efficiency, often through innovation or technological advancement.
What is X-Inefficiency?
-Occurs when a firm lacks the incentive to control production costs. Slack occurs as a consequence
-The ATC is higher than it should be
-Occurs in an industry if there is a lack of competition or in a firm that is not accountable for making a loss
-Inefficiency arises when a firm’s management or workers are not fully utilizing available resources, leading to higher production costs than necessary.
What are some examples of companies that aren’t accountable for making a loss?
Some government owned companies
What are market structures?
The characteristics of the market in which a firm or industry operates
What are some of these characteristics of market in which a firm or industry operates?
-Number of buyers
-Number and size of firms
-Type of product in market (homogenous or differentiated)
-Types of barriers to entry and exit
-Degree of competition
What are the two things Market structures can be seperated into?
Perfect competition and Imperfect Competition
What is Perfect Competition?
A market structure in which individual firms have no market power due to the amount of competition and are unable to influence the price
What is Imperfect Competition?
Market structures where firms do have some power and can influence prices
What three market structures does Imperfect Competition include?
- Monopolistic
- Oligopoly
- Monopoly
What does Monopolistic mean as a type of market structure?
A market structure in which there are many firms offering a similar product but with some product differentiation
What is an example of a Monopolistic firm?
E.g. Nail Salons
What does Oligopoly mean as a type of market structure?
A market structure in which a few large firms dominate the industry with each firm having significant market power
What does monopoly mean as a type of market structure?
A market structure where there is a single supplier of a particular product and has the power to influence the market supply and price
What does Perfect Competition look like on a graph?
Slide 15
What types of efficiency will a firm in a perfectly competitive market experience?
They will experience allocative and Productive Efficiency
What does Imperfect Competition look like on a graph?
Slide 16
What types of efficiency will a firm in a imperfect market experience?
An imperfect market will have inefficiencies exist at the profit maximisation level of output. Prices are being set above equilibrium, price discrimination may happen, barriers to entry being created, asymmetric info and there may be external costs or benefits of the production
