Efficiency Flashcards
What is allocative efficiency for a firm
Where resources follow consumer demand and society surplus and net social benefit is maximised (i.e. consumer and producer surplus is maximised)
Where does allocative efficiency occur for a firm
Where demand = supply so AR = MC so P = MC
How does allocative efficiency impact consumers
- Resources follow consumer demand so consumers are getting exactly what they want in the quantity they want
- Get lower prices than profit max for example
- Consumer surplus is being maximised
- Lots of choice for consumers as the market produces the types and quantities of goods that consumers want
- Higher quality products if that is what consumers are demanding
How does allocative efficiency impact the producer
- Retain/ increase market share as they are producing at a lower price, allowing the firm to stay ahead of rivals
- Could increase profit in the long term as they have more consumers who will be loyal
What is productive efficiency for a firm
The maximisation of output at the minimum possible average cost as the firm is fully exploiting their economies of scale (MES)
How does productive efficiency impact consumers
Firms are fully exploiting their economies of scale to minimise AC so consumers are getting lower prices and this means they are getting high consumer surplus (not max but still high)
How does productive efficiency impact producers
- More production at lower costs, leading to higher profits
- Lower costs could be passed on to consumers in the form of higher prices, leading to higher market share
What is X efficiency for a firm
Where the firm is producing at any point on the AC curve as the AC curve is the lowest possible cost at that level of output so there is no waste
i.e. the firm may not be large enough to be productively efficient as they cannot fully exploit economies of scale but even at lower quantities they should be minimising AC
How does X efficiency impact consumers
No waste of resources means lower prices so high consumer surplus
How does X efficiency impact producers
- Lower costs means higher profit
- Firm can pass on lower prices to consumer, increasing/retaining market share
Where would a firm that is X inefficient produce
At a point above the average cost curve so there is waste
Why would a monopoly be X inefficient
- No competition so monopoly gets complacent and allows waste
- However, still wants to max profit so should still want to be X efficient but they would have to remove staff perks and reduce wages
- Difficult thing for monopolies to do and would make them unpopular so they allow the waste to continue
Why would a public sector firm be X inefficient
They want to maximise social welfare instead of maximising profit
Less profit drive leads to less incentive to try be X efficient so waste creeps in
What is dynamic efficiency
Reinvestment of long run supernormal profit back in to the business in the form of new/upgraded capital and technology, R&D and new innovation
How can you show dynamic efficiency on a diagram
Show area of supernormal profit on curve through (difference between AR and AC) x quantity sold
How does dynamic efficiency impact consumers
- New innovative products
- Lower prices as investment can lower LRAC which can be transferred to consumers
- These lower prices and better quality for same price will lead to higher consumer surplus in the long run
How does dynamic efficiency impact producers
- Allows the firm to keep high profits in the long term by stay ahead of rivals through constantly innovating
- Lowers costs over time to increase profits further
- Staying ahead of rivals leads to increased market share, especially if the firm is patenting new technology
What is the difference between static efficiency and dynamic efficiency
Static efficiency is the optimal conditions that can occur in the current state of the market
i.e. productive, allocative, X
Dynamic efficiency occurs over time
