Dynamic Efficiency

• Factors that affect dynamic efficiency

  • Investment in new technology and improved capital
  • State of technology
  • Motivation of workers and managers
  • Access to finance
• Diagram to show Dynamic efficiency

  LRAC shifts to the left. This means average costs decrease in the long run.

  A) Costs/Revenues

  B) AC1

  C) AC2

  D) LRAC 1

  E) LRAC 2

  F) Q1

  G) Quantity

  
• What would happen if firms didn't invest or innovate?

  Firm may not improve over time
• What do firms have to compromise when they invest?

  Higher costs in the Short-run
• What can a firm invest in?

  • Technology
  • Machines
  • Human capital
• How can a firm improve its human capital?

  • They can implement better working practices
  • Employ specialist managers
  • Improve relationship with unions
• What would improve with human capital investment?

  Labour productivity
• What makes a firm dynamically efficient?

  Any firm that is able to reduce its cost curves by implementing new production processes. (Enabling a reduction in both SRAC and LRAC)
• Dynamic efficiency

  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