Efficiency

• What is efficiency?

  A measurement of how well resources are used, comparing the output to another factor such as cost
• What is allocative efficiency?

  A situation where the price is equal to the marginal cost of production, or when people are paying the amount it costs to produce the last unit
• When is there a situsation when there is over allocative efficiency?

  When consumer satisfaction is higher than the cost of making the last unit meaning people would be preparaed to pay more than the cost, thus resulting in firms increasing production
• When is there a situation when there is under allocative efficiency?

  When consumer satisfaction is lower than the cost of making the last unit meaning people would be prepared to pay less than the cost, thus resulting in firms decreasing production
• What is productive efficiency?

  A situation where a firm operates at the output where average cost is lowest, which is represented as the lowest point on the average cost curve
• What is the relationship between average cost and marginal cost?

  Average cost will be equal to marginal cost at the lowest point of the average cost curve
• What does productive efficiency mean to consumers?

  It is the lowest price the consumer can get, and the point where consumer surplus is the highest
• When do firms not operate at the productive efficiency point?

  If the firm is not operating in a perfectly competetive market, such as if the firm is a monopoly
• What is dynamic efficeincy>

  A situation where a firm uses its resources more efficiently over time
• How is dynamic efficiency different from allocative and productive efficiency?

  Allocative and productive efficiency only measures the most efficient combination of resources at one point in time, therefore being forms of static efficiency
• How can dynamic efficiency be achieved?

  Through innovation that leads to the development of new products, investment in new production processes, investment in human capital through training, and improvements in working practices
• What is X inefficinecy?

  A situation where a firm's costs increase because there is a lack of competitive pressure in the market
• In which markets does X inefficiency occur?

  In a monopoly or in markets where firms are subsidised by the public sector