3.4.1 Efficiency

• Different types of efficiency:

  -Allocative efficiency (a type of static efficiency)

  -Productive efficiency (a type of static efficiency)

  -X-inefficiency (a type of static efficiency)

  -Dynamic efficiency
• Allocative efficiency:

  When scarce resources are used to produce goods which maximises consumer welfare.

  The allocatively efficient quantity of a good is where P=MC.
• How can firms improve allocative efficiency:

  -By reducing prices so that they're closer to MC

  -By developing new products that better satisfy consumers.
• Productive efficiency:

  Achieved when production takes place at lowest average cost.

  On a diagram, productive efficiency occurs when a firm is producing at the lowest point on AC.
• X-inefficiency:

  Occurs when a firm fails to minimise its AC at a given level of output.

  On a diagram, X-inefficiency is shown by a firm having an AC above its AC curve.
• What are the causes of X-inefficiency?

  -Poor management resulting in overemployment of factors of production which unnecessarily increases costs

  -Higher pay than necessary due to trade union action
• Dynamic efficiency:

  Occurs when allocative and productive efficiency improve over time

  Usually this occurs when firms make SNP -> can be used for R&D -> this can either lead to improved products for consumers (improved allocative eff) OR it can lead to improved production processes which reduce AC (improve productive eff).