Performance of Firms Flashcards
Criteria (P.A.D.E.C.)
State P
Productive efficiency - “how to produce”
Criteria (P.A.D.E.C.)
State A
Allocative efficiency - “what and how much to produce”
Criteria (P.A.D.E.C.)
State D
Dynamic efficiency - “innovation”
Criteria (P.A.D.E.C.)
State E
Equity - “for whom to produce”
Criteria (P.A.D.E.C.)
State C
Consumer choice
Productive efficiency in terms of firms’ POV
P - “how to produce”
firm produces at any point on LRAC
Productive efficiency in terms of society’s POV
P - “how to produce”
firm produces at the min point of LRAC, i.e. minimum efficient scale (MES)
Allocative efficiency
“what and how much to produce”
Firm produces at the socially optimum output level where P=MC
Dynamic efficiency: Incentive
“innovation”
Incentive to innovate: Level of market competition and contestability
Dynamic efficiency: Ability
“innovation”
Ability to innovate: any sustained supernormal profits (based on BTE) to invest in R&D?
Equity
“for whom to produce”
Equity - “for whom to produce”
Distribution of income and wealth - is the G/S produced equally accessible to all, regardless of the profits level in the LR?
