Efficiency

Question 1

Efficiency def.

Answer 1

The extent to which scarce resources are used to successfully satisfy wants

Question 2

Static Efficiency

Answer 2

Concerned with efficiency at a specific point in time e.g. a country producing within its PPF still has unemployed resources and thus is allocatively inefficient

Question 3

Dynamic Efficiency

Answer 3

Looks at efficiency over a period of time e.g. if firms merge or acquire, often they will be able to expand as they have more capital to invest into R&D

Question 4

Allocative Efficiency & Formula

3

Answer 4

The extent to which resources are allocated to their most valued use

P=MC

Can only be achieved if there are no externalities. Positive = Under produced, Negative = over produced

Question 5

Productive Efficiency

3

Answer 5

If a given level of output is available at the lowest poissble average cost

In the short run, it is achieved if a firm produces at the lowest point on its Short Run Average Cost Curve, where MC=AC

In the long run, it is achieved if a firm produces at the lowest point on its Long Run Average Cost Curve

Question 6

X-Inefficiency (Organisational Slack)

3

Answer 6

Type of productive inefficiency where a firm doesn’t strive to achieve reduce costs.

Often occurs in monopoly powers as the abstence of competition means they don’t strive to reduce costs to be more competitive

Often occurs as it makes life ‘easier’ for the managers

Joseph Schumpeter argues that monopolies actually lead to more innovation as supernormal profits can be invested in R&D