Efficiency

• What are the four types of efficiencies in economics?

  Allocative, productive, X-inefficiency, dynamic
• Why is it important to recognize different names for efficiencies?

  Different names can cause confusion in revision
• What does efficiency focus on in economics?

  Optimal production and distribution of resources
• What is productive efficiency?

  • Producing goods at lowest cost per unit
  • Optimal combination of inputs for maximum output
  • Occurs at the lowest point on average cost curve
• What does it mean for an economy to be productively efficient?

  Producing on its production possibility frontier
• What is allocative efficiency?

  • Distribution of goods according to consumer preferences
  • Price equals marginal cost (MC) of production
  • Optimal distribution occurs when marginal utility equals marginal cost
• When does allocative efficiency occur?

  When price equals marginal cost of production
• How can a firm be productively efficient but not allocatively efficient?

  By producing goods that consumers do not want
• What is Pareto efficiency?

  Optimal allocation where no one can be better off
• How does competition affect productive efficiency?

  • Encourages firms to produce at lowest average costs
  • Increases potential for super-normal profits
  • Reduces risk of losses from inefficiency
• What is X-inefficiency?

  Higher actual costs due to lack of competition
• What advantages do large firms without competition have?

  Economies of scale
• How does competition influence allocative efficiency?

  • Encourages production of goods consumers want
  • Increases potential for super-normal profits
  • Reduces risk of losses from inefficiency
• What is the impact of a monopolist on X-inefficiency?

  Less incentive to invest or control costs
• What is dynamic efficiency?

  • Efficiency over time with technological progress
  • Involves new technology and practices
  • Associated with investment in R&D
• How can dynamic efficiency be identified?

  By observing supernormal profits enabling R&D
• What boosts dynamic efficiency?

  • Research and development spending
  • Investment in workforce human capital
  • Greater competition and knowledge transfer
• What are the general evaluations of efficiency?

  • Increases employment with higher output
  • Reflects consumer demands in products/services
  • Lowers prices if costs are reduced
  • Reduces wastage of scarce resources
• What could be a consequence of decreasing output?

  Increased unemployment and redundant capital
• What is a potential issue with capital-intensive production?

  It may replace labor, causing unemployment