Efficiencies

• Dynamic efficiency: Occurs in the long run, leading to the development of new products and more efficient processes that improve productive efficiency
• X-inefficiency: Lack of incentive to reduce costs
• Productive efficiency: This is to operate at the lowest point average cost and is the point where the MC curve crosses the bottom of the AC curve.
• Allocative efficiency: This is concerned with the optimal distribution of products. This occurs if the price is equal to marginal cost.
• Allocatively efficient

  AR/P = MC
• Productively efficient:

  Minimum point of AC curve
• Static efficiency is when firms are allocatively efficient, productively efficient and X-efficient
• Allocative efficiency p = mc

  Where resources follow consumer demand D = S

  Where society surplus is maximised MSB = MSC

  Where net social benefit is maximised
• Productive efficiency

  When a firm is operating at the lowest point on their ac curve by fully exploiting EoS
• X - efficiency

  Minimising waste and producing on the AC curve monopoly can have x - inefficiency and reducing it may mean reducing wages and is difficult and undesirable
• Dynamic efficiency

  Re investment of LONG RUN supernormal profit
• Static vs Dynamic efficiency

  Static efficiencies occur at one specific production point

  Dynamic efficiency occurs over time
• Allocative efficiency

  Def: D = S

  Condition: P = MC

  Consumer Analysis:

  i) Resources follow consumer demand

  ii) Low prices

  iii) Maximisation of consumer surplus

  iv) High choice

  v) High quality

  Producer analysis:

  i) Retain or increase market share

  ii) Stay ahead of rivals

  iii) increased profits - by bringing more consumers to them
• Productive efficiency:

  Def: Maximising output at lowest possible AC . Full exploitation of EoS

  Condition : Min of AC / AC = MC

  Consumer Analysis:

  I) lower prices - due to the passing on of lower costs

  ii) High consumer surplus

  iii) Full exploitation of EoS

  Producer Analysis:

  i) More production at lower AC

  ii) Higher profit

  iii) Lower prices / greater market share
• Dynamic efficiency:

  Def: Re-investment of Super Normal Profit into innovation to decrease LRAC

  Condition: Supernormal profit in long run

  Consumer analysis:

  i) New innovative products

  ii) Lower prices over time - new tech lowering ac and lowering price

  iii) High consumer surplus - increase competition

  Producer Analysis

  i) LR profit max - continually looking to innovate

  ii) Lower costs over time

  iii) Retain / increase market share + staying ahead of rivals
• X - efficiency:

  Def: Production with no waste

  Condition: Production on AC curve

  Consumer Analysis:

  i) Low Prices

  ii) Higher consumer surplus

  Producer Analysis:

  i) Lower costs

  ii) Higher profits

  iii) Lower prices and increase in market share