Theme 3: Types of Efficiency Flashcards
1
Q
What is productive efficiency
A
When average costs are at their lowest.
MC = AC
2
Q
Show productive efficiency on a graph
A
3
Q
What is allocative efficiency?
A
Where welfare is maximised
MC = AR
4
Q
Show allocative efficiency on a graph
A
5
Q
What is X-inefficiency?
A
At a given level of output, costs are above the AC curve. The firms AC are higher than they should be.
6
Q
Show X-inefficiency on a graph
A
7
Q
What is dynamic efficiency?
A
How changing technology improves a firms output potential over time.
8
Q
What does a firm have to have to be able to experience dynamic efficiency?
A
A firm needs supernormal profits to be able to invest in R&D.
So they need AR > AC
