Types of Efficiency

Question 1

Productive Efficiency

Answer 1

Productive efficiency occurs when the economy is on the production possibility frontier (PPF). It will also occur at the lowest point on the firm’s SRAC curve.

Question 2

Allocative efficiency

Answer 2

This occurs when goods and services are distributed according to consumer preferences. This occurs at an output where P=MC because, at this value, what the marginal benefit consumers get is the same as the marginal cost

Question 3

X - efficiency

Answer 3

This occurs when firms’ actual costs are as low as potential. A firm exhibits x-inefficiency if it lacks incentives to cut costs and so its actual costs are higher than they could be.

Question 4

Efficiencies of scale

Answer 4

This occurs when a firm produces on the lowest

point of its long run average cost, and therefore benefits fully from economies of scale.

Question 5

Dynamic efficiency

Answer 5

This refers to efficiency over time. For example, if firms introduce new technology,it enables them to reduce costs over time and their average cost curve will shift downwards. Dynamic efficiency is also influenced by investment in human capital and investment in capital
and technology.

Question 6

Static efficiency

Answer 6

This is concerned with efficiency at a particular point in time, and making the most of existing capital and technology

Question 7

Social efficiency

Answer 7

This includes all external costs and benefits. This

occurs where social marginal cost = social marginal benefit