efficiencies

• Allocative efficiency

  Occurs where demand equals supply in a market, maximizing the sum of producer and consumer surplus
• Allocative efficiency on a business diagram

  Where price equals marginal cost
• Allocative efficiency for consumers

  • Resources are following consumer demand, consumers get exactly what they want in the quantity they want, low prices maximizing consumer surplus, high choice and high quality of production
• Allocative efficiency for producers

  • Allows them to retain or increase market share, increase profits by bringing more consumers
• Productive efficiency

  Maximization of output at the lowest possible average cost, full exploitation of economies of scale
• Where productive efficiency occurs

  At the lowest point of average cost, where marginal cost equals average cost
• Productive efficiency for consumers

  • Lower average costs may be passed on as lower prices, increasing consumer surplus
• Productive efficiency for producers

  • More production at lower costs, translates to higher profits, allows them to stay ahead of rivals by retaining or increasing market share
• Dynamic efficiency

  Reinvesting supernormal profit into R&D and new technology to lower long-run average costs over time
• Condition for dynamic efficiency

  Existence of supernormal profit in the long run
• Dynamic efficiency for consumers

  • Leads to innovative new products, lower prices over time due to new technology and production techniques, increased competition
• Dynamic efficiency for producers

  • Allows for long-run profit maximization, staying ahead of rivals, gaining patents/copyrights/licenses, increasing market power
• 1. efficiency

  Production with no waste, production at any point on the average cost curve
• 1. efficiency for consumers

  • Lower costs may be passed on as lower prices, increasing consumer surplus
• 1. efficiency for producers

  • Lower costs mean higher profits, allows them to pass on lower prices to increase or retain market share
• Allocative, productive and x-efficiency are static efficiencies as they occur at a specific production point, while dynamic efficiency takes place over time
• Economics

  The study of how to best solve the basic economic problem: how to allocate scarce resources given unlimited wants that forces choices to be made on what to produce, how to produce, and for whom to produce
• Market economy

  • Businesses answer what to produce and how to produce
  • Businesses are a fundamental part of answering the basic economic problem
• Efficiencies to study in economics

  • Allocated efficiency
  • Productive efficiency
  • X efficiency
  • Dynamic efficiency
• Allocated efficiency

  Occurs where resources follow consumer demand, society surplus is maximized, and net social benefit is maximized
• In an economic market, allocated efficiency

  Occurs where demand equals supply and MSB equals MSC (assuming no externalities)
• In a business sense, allocated efficiency

  Occurs where average revenue (price) equals marginal cost
• Productive efficiency

  Occurs when a firm is operating at the lowest point of its average cost curve, fully exploiting economies of scale
• X efficiency

  Occurs when a business is minimizing its waste, producing on its average cost curve
• Causes of X inefficiency

  • Lack of competitive drive in monopolies
  • Lack of profit motivation in public sector firms
• Dynamic efficiency

  The reinvestment of long-run supernormal profit back into the business in the form of new capital, greater capital, new technology, innovation in R&D, factory expansion, etc.
• Static efficiency

  Consists of allocated, productive, and X efficiency - efficiencies that occur at one specific production point
• Dynamic efficiency

  Occurs over time, unlike static efficiencies