Efficiency

Question 1

Types of Efficiency

Answer 1

Productive Efficiency
Allocative Efficiency
Dynamic Efficiency
Static Efficiency
X-inefficiency

Question 2

Productive Efficiency

Answer 2

When average cost is at its lowest

MC=AC is where AC is lowest

Question 3

Allocative Efficiency

Answer 3

When welfare is maximised

MC=AR
The cost to producers for making an extra unit matches the price consumers are willing to pay

Question 4

Dynamic Efficiency

Answer 4

When changes in technology improve a firm’s output potential over time

Firms need to be making Supernormal profit that they can use to invest into research and development of new technology. Technology makes them more efficient

Question 5

Static Efficiency

Answer 5

When efficiency is at a certain point in time

e.g allocative and productive efficiency

Question 6

X-inefficiency

Answer 6

When for a given level of output, the firms costs are above their average cost curve

Usually due to poor management, laziness from lack of incentive and excessive bonuses