LS7 - Efficiency

Question 1

What is efficiency concerned with in economics?

Answer 1

Efficiency is concerned with how effectively scarce resources are used to produce an output.

Question 2

Define Productive Efficiency.

Answer 2

Productive efficiency is the minimum average cost at which output can be produced, ensuring that the firm is producing as much as possible relative to inputs.

Question 3

Describe the decision process for a firm who wants to achieve Productive Efficiency.

Answer 3

The firm decides how much output to produce, chooses an appropriate combination of factors of production, and attempts to produce as much output as possible while minimizing production costs.

Question 4

What is Allocative Efficiency?

Answer 4

Allocative efficiency refers to whether an economy allocates its resources to produce a balance of goods and services that matches consumer preferences.

Question 5

How does the notion of Allocative Efficiency relate to equilibrium in the demand and supply model?

Answer 5

In an individual market, allocative efficiency means that firms are producing the ideal amount of a good that consumers wish to buy, achieving equilibrium where prices balance demand and supply.

Question 6

Define Dynamic Efficiency.

Answer 6

Dynamic efficiency considers how changes in technology and productive techniques over time will increase the productive potential of a firm, emphasizing long-term improvements.

Question 7

Who introduced the notion of Dynamic Efficiency

Answer 7

Joseph Schumpeter.

Question 8

What is X-inefficiency?

Answer 8

X-inefficiency occurs when a firm operates above its lowest-possible long-run average cost curve, producing at a higher cost than necessary due to managerial slack or lack of accountability.

Question 9

How does X-inefficiency affect a firm’s production?

Answer 9

X-inefficiency leads to a firm producing at a higher average cost than it could achieve, resulting in decreased overall efficiency.

Question 10

Summarize the forms of efficiency discussed.

Answer 10

Productive efficiency ensures lowest cost per unit, allocative efficiency matches production with consumer demand, dynamic efficiency focuses on long-term improvements, and X-inefficiency involves operating above the lowest possible cost curve.