Micro A2 - Efficiency

Question 1

Allocative efficiency

Answer 1

when there is an optimal distribution of goods and services, taking into account consumer’s preferences.

MU = MC

Question 2

Productive efficiency

Answer 2

When goods / services are produced with the best possible combination of inputs and outputs. Usually along the PPF curve.
E.g. point A & B

Question 3

Dynamic efficiency

Answer 3

• The increase in productive efficiency of a firm over time.
  E.g. LRAC 2010 > LRAS 2017

Question 4

X-efficiency

Answer 4

when a lack of effective / real competition in a market or industry means that average costs are higher than they would be with competition.

E.g. AC1 > AC2

Question 5

Efficiency in competitive markets

Answer 5

• They are , in the long run, productively efficient as they produce on the PPF and at the lowest point of the AC curve.
• X-efficacy is likely to occur as firms will act to increase efficiency and productivity
• Are also allocative efficient as price is equal to MC

Question 6

Efficiency’s in monopoly markets

Answer 6

Monopoly’s may be dynamically efficient as the use their super normal profit to invest into R&D to innovate and reinforce their monopoly power.

Question 7

Efficiency’s in oligopoly markets

Answer 7

• Can be dynamically efficient as they have profits which they are ale to invest into new products and the competitive pressures encourage them to innovate.
• If oligopolies are competitive then they may lower prices and become more allocative efficient.

Question 8

Inefficiency’s in competitive markets

Answer 8

Their lack of super normal profit makes investment in R&D unlikely therefore, dynamic efficiency is unlikely to occur.

Question 9

Inefficiency in monopoly markets

Answer 9

• Are both allocative and productively inefficient as their price is greater than MC and output does not occur at the lowest point on the AC curve
• Is also x-inefficient as they have no incentive to cut costs due to lack of competition.

Question 10

Inefficiency’s in oligopoly markets

Answer 10

• Although firms operating the kinked demand curve may end up setting price higher than MC, therefore not being allocative efficient.
• May be less productive efficient than competitive markets as they often produce at higher average total cost.