5.11

• static efficiency defintion

  Efficiency at a particular point in time, focusing on how well resources are currently being used
• what are the two types of static efficiency ?

  • productive efficiency - producing at the lowest cost (on the AC curve)
  • allocative efficiency - resources allocated to match consumers wants (P=MC)
• what is productive efficiency ?

  producing at the lowest average cost - no waste of resources
• what is allocative efficiency?

  when price equals marginal cost (P=MC) - meaning resources go where they’re most valued by consumers
• what is dynamic efficiency?

  efficiency over time - when firms innovate, invest in R&D, or improve quality, usually funded by supernormal profits
• which market structure is most productively and allocatively efficient ?

  • perfect competition - in the long run
• which market structure is best for dynamic efficiency?

  monopoly or oligopoly

  • they earn supernormal profits - used for innovation, R&D

  but only if they’re not lazy or x-inefficient
• what is X-inefficiency?

  when a firm has no incentive to cut costs, often in monopolies - leading to waste and higher average cost
• what is the link between market structure and resource allocation?

  • perfect competition leads to best allocation (P=MC)
  • monopoly may under-allocate resources (P>MC)
  • monopolistic competition - better for choice but not fully efficient
  • oligopoly - depends on pricing + behaviour (e.g collusion vs. competition)
• why is dynamic efficiency important for long-run consumer welfare?

  • leads to better quality
  • new products
  • potentially lower costs over time

  but only if profits are reinvested, not hoarded
• evaluation: should we always prefer static or dynamic efficiency?

  depends:

  • static efficiency - great for short-run resource use
  • dynamic efficiency - better for innovation and progress