Market Structure, static Efficiency, Dynamic Efficiency & Resource Allocation

Question 1

Static & Dynamic Efficiency

Answer 1

Static Efficiency: Level of efficiency at one point in time, (e.g productive & allocative efficiencies)

Dynamic Efficiency: Concerned with new technology & increases in productivity, causes efficiency to increase over a period of time

Question 2

Conditions Required For Productive & Allocative Efficiency

Answer 2

• Productive Effeciency: When firms produce at lowest point on AC curve
• Where MC = AC, All points on PPF curve are productively efficient
• Allocative Efficiency: When resources are distributed to the G&S consumers want
• Maximises utility, when P = MC, means consumers pay for marginal utility they derive from consuming G&S
• Free markets considered to be allocatively efficient

Question 3

Dynamic Efficiency

Answer 3

Dynamic Efficiency: When all resources are allocated efficiently over time, & rate of innovation is at optimum level, leads to falling LRAC
- Dynamically efficient if consumer needs & wants are met as time goes on
- Related to rate of innovation, might lead to lower costs of production, or creation of new products
- Dynamic efficiency affected by SR factors (e.g demand, interest rates & past profitability)
- Short run costs might be increased in order to cause long run costs to fall
- Can be evaluated by considering long time lag between investment & falling AC & how factors change in LR
- Firms face trade-off between giving shareholders dividends & making an investment

Question 4

X-Inefficiency

Answer 4

X-Inefficiency: When firm is producing within AC boundary
- Costs higher than they would be with competition in the market
- Could be due to organisational slack, waste in production process, poor management, or simply laziness
- Monopolies often x-inefficient, little incentive to lower AC because of lack of competition