Business Efficiency

• 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, which are fundamental parts of answering the basic economic problem
• Four 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 marginal social benefit equals marginal social cost (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 all potential economies of scale
• 1. efficiency


  Occurs when a business is minimizing its waste, i.e. there are no excess costs, by 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, or factory expansion
• Static efficiency


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


  Occurs over time, unlike static efficiencies