Efficiency Flashcards
So this firm here would be productively efficient at:
Productive efficiency is where AC is lowest, where MC = AC,
So, allocative efficiency is where:
MC = AC is productive efficiency. Welfare is maximised where MC = Price (AR)
So… allocative efficiency is when:
MC = Price, MC = AR, MC = Demand
To become dynamically efficient and innovate with new technology, firms need to invest into research & development (R&D).
So firms can only be dynamically efficient if:
To be able to invest into R&D and better capital, firms need to make supernormal profit so they have extra profit available for investment.
Productive efficiency
When a firm is producing at its lowest average cost, where MC = AC.
Allocative efficiency
When welfare is maximised, where MC = AR.
X-inefficiency
When a firm is producing above its average cost curve for a given level of output.
Dynamic efficiency
Dynamic efficiency is how changing technology improves a firm’s output potential over time.
X-inefficiency is most likely to exist in markets where:
X-inefficiency is where the firm’s costs are above its average cost curve. If it is paying for lots of perks then its costs are likely to be above its AC curve which means it is X-inefficient.
Influencers of the firm
The firm is influenced by its: owners, shareholders, directors/managers, workers and consumers.
Shareholders objectives
Shareholders usually look to maximise profit.
Directors/managers objectives
Directors and managers usually look to maximise sales or revenue.
Maximising sales increases their sales bonus and maximising revenue increases company size, boosting their prestige.
Workers objectives
Workers want higher wages, job security and improved working conditions.
Consumers objectives
Consumers want lower prices, better customer service and quality, and they also care about social and environmental causes (e.g. homeless people and polar bears).
