4.1.5.10 Market Structures and efficiency

• What to produce is called allocative efficiency
• How to produce is known as productive efficieny
• Who get the reward is known as distributive efficiency
• A firm is allocatively efficient when?

  price = marginal cost
• When P > MC


  The firm benefits at the expense of the consumer
• When P < MC


  the consumer benefits at the expense of the firm
• Consumer surplus + Producer Surplus = Community Surplus
• Allocative efficiency means no one can be made better without someone else being made worse off
• Point A is allocatively efficient because it lies on the PPF

  
• Which point is not allocatively efficient?

  B

  
• A firm is productively efficient when they produces at the minimum of the Long Run Average Cost Curve (LRAC)
• If MC = AC then a firm is?

  productively efficient
• This diagram shows productive efficiency.

  
• If a firm is productively efficient, then they minimise the waste of resources
• When does a firm have static efficiency?

  When both allocatively and productively efficient
• Dynamic efficiency shows how productive efficiency improves over time
• Dynamic Efficiency is shows my the LRAS shifting downwards. This is done by companies using super normal profits to invest in R n D
• This diagram shows dynamic efficiency

  
• In the short run, perfect competition is allocatively efficient
• In the long run, perfect competition if allocatively, productively and therefore statically efficient
• Perfect competition is never dynamically efficient as it does not make high enough, or no supernormal profit
• A market in imperfect competition, that aims to profit maximise is never allocatively efficient in both the short and long run
• If a Monopoly does not aim to profit maximise, then it can be allocatively efficient
• A monopoly and oligopoly (collusive and competitive) can make supernormal profits, therefore can have dynamic efficiency
• An imperfect market structure can not be statically efficient
• A competitive oligopoly can be productively efficient in both the short and long run
• In monopolistic competition, the firm is not allocatively or productively efficient in the short and long run.
• In monopolistic competition, the firm can by dynamically efficient in the short run as it makes super normal profit
• In monopolistic competition, the firm can not be dynamically efficient in the long run as it does not make super normal profit
• X - Inefficiency: firms that have a large market share can become complacent, so are less worried about higher cost of lack of organisation, therefore costs rise above the LRAC
• This diagram shows X Inefficiency
• Point B is not allocatively efficient

  
• This diagram shows X inefficiency