LS7 : Efficiency Flashcards
what is efficiency?
how well resources are used to produce an end result. the relationship between scarce inputs and outputs.
what is productive efficiency?
the minimum average cost at which output can be produced. average cost is likely to vary at different scales of output.
q-* is the most optimum level of output as it minimises average cost per unit of output
the firm will choose its desired output level on the basis of current or expected market conditions once the firm has chosen, they install the necessary capital, which the firm is then tied into in the short run.
what is allocative efficiency?
when there is an optimal distribution of goods and services, taking into account customer preferences.
allocative efficiency is when price = marginal cost of production. this is because the price that consumers are willing to pay is equivalent to the marginal utlity that they get. so optimal distribution is when MU = MC.
this is also called welfare maximisation.
essentially occurs when price = MC or S=D
what is dynamic efficiency?
recognises that state of knowledge and technology changes over time.
for example, investment in research and development today means that production can be carried out more efficiently in the future.
there may be a trade-off between achieving efficiency today and improving efficiency tomorrow
very different from productive and allocative efficiencies which are assumed to be static
what is X-efficiency?
occurs when the average cost is higher than the lowest possible average cost. the firm operates above its AC curve.
happens in highly concentrated markets (monopoly, oligopoly) where firms can make supernormal profits and where AR is greater than AC. this reduces the need to lower AC and decrease x-inefficiency.
