Types of efficiencies

Question 1

Define productive efficiency

Answer 1

Productive efficiency occurs where no additional (or maximum) output can be produced from the factor inputs available at the lowest possible average or unit costs. Thus, average costs are minimised.

Question 2

Define allocative efficiency

Answer 2

Allocative efficiency occurs where consumer satisfaction is maximised in the production of goods and services.

At this point quantity supplied will equal quantity demanded and P = MC.

Question 3

Define economic efficiency

Answer 3

Economic efficiency indicates an economic state in which all resources are allocated to serve each person in the best way possible, minimising waste and inefficiency. In such an economy, any changes made to help one person would harm another.

Question 4

Define static efficiency

Answer 4

Static efficiency when all resources are being used in the most efficient manner at a point in time.

Question 5

Define dynamic efficiency

Answer 5

Dynamic efficiency occurs where firms improve technology and production methods over a period of time.

Question 6

What is dynamic efficiency influenced by?

Answer 6

Innovation, new product and new process development are likely to occur if supernormal profits are available for investment.

This will means that consumer will and gain and there is an improve in social welfare as improvements technology will be able to improve the quality of the product as well as producing it at a lower cost.

Question 7

Define X-inefficiency.

Answer 7

X-inefficiency occurs when a firm is not operating at its lowest average cost as there are no incentives for it to do this.

This might be seen in:

State run organisations employing labour due to political rather than financial factors.

Firms with monopoly power earning supernormal profits and not having to control costs.