3.4.1 - Efficiency

• Allocative efficiency occurs when resources are distributed to the goods and services that consumers want
• Productive efficiency: This is when firms produce at the lowest point on the short run or long run average cost curve
• Allocative and productive efficiency are forms of static efficiency

  
• Dynamic efficiency is when all resources are allocated efficiently over time, and the rate of innovation is at the optimum level, which leads to falling long run average costs
• Dynamic efficiency is affected by short run factors such as demand, interest rates and past profitability.
• A firm is x-inefficient when it is producing within the AC boundary. Costs are higher than they would be with competition in the market. The point ‘X’ on the diagram shows x-inefficiency

  
• Allocative efficiency is when MC = AR (price)
• Productive efficiency is when MC = AC
• X-Inefficiency is when the firm is above the AC curve at a given level of output
• Dynamic efficiency is how changing technologyImproves a fire's output potential overtime