LS7 - Efficency

Question 1

Efficiency

Answer 1

It’s concerned with how well resources, such as time, talents or materials, are used to produce an end result. In economic terms, it is concerned with the relationship between scarce inputs and outputs.

Question 2

Types of efficiency

Answer 2

• productive efficnecy
• allocative efficiency
• dynamic efficiency
• x-inefficiency

Question 3

Productive efficiency

Answer 3

• can be seen in terms of the minimum average cost at which output can be produced - know cost can very at different output scales
• for firm, 3 stage procedure - need to decide how much output to produce, an appropriate combo of factors of production, attempts to produce as much output as possible given inputs
• choses desired output based on current/expected market conditions
• where MC intersects AC

Question 4

Allocative efficiency

Answer 4

• if economy allocates resources to produce balance of good/services that matches consumer preference (supply meets demand)
• in individual market, production of the ideal amount of good a consumer wants to buy
• can be market failure preventing this
• Firms will charge a price equal to the marginal cost (P = MC) of manufacturing the good. It is where the price charged for the last unit (the
  amount people are prepared to pay) is equal to the cost of making the last unit, so net welfare falls if any more units are produced. It is also called welfare maximisation.

Question 5

Dynamic efficiency

Answer 5

• recognises the state of knowledge and tech changes over time e.g. R&D means production can be more efficient at a future date
• new product development may mean a different mix of good/service may serve consumers better in long term
• different from productive & allocative efficiencies - assumed to be static

Question 6

X-inefficiency

Answer 6

• occurs when the average cost is higher than the lowest possible average cost: in other words, the firm operates above its AC curve.
• This can happen in highly concentrated markets, such as monopoly and oligopoly, where firms are able to make supernormal profits and have an AR that is greater thah their AC, thus reducing the need or desire to lower AC and decrease x-inefficiency.