efficiency

• economic efficiency

  how well our scarce resources such as time, labour, materials are used to produce our desired end result

  several meaning of efficiency but all link to how well a market system allocates scarce resources to satisfy consumer wants

  normally the market mechanism is good at allocating these inputs but there's occasions when it fails

  allocative, productive, dynamic, social efficiency
• allocative efficiency


  reached when no one can be made better off without making someone else worse off

  also known as pareto efficiency/optimality

  occurs when the value that consumers place on a good or service equals the marginal cost of the scarce factor resources used up in production

  main condition required is that market price = marginal cost of production (P=MC)
• allocative efficiency occurs when market price = marginal cost of production (P=MC)

  
• allocative efficiency is at an output which maximises total consumer welfare at market equilibrium price, consumer and producer surplus is maximised - at this output, economic welfare is mastered
• social efficiency (allocative efficiency)


  exists when MSB=MSC, existence of externality means private level of consumption or production differs from the social optimum

  free market price mechanism doesn't always take social costs + benefits into account

  
• social efficiency - PPE

  all points on PPE are allocatively efficient, cannot produce more of one product without affecting the amount of all other products available
• productivity

  measures the relationship between inputs into the production process and the resultant outputs
• measuring productivity

  output per worker or hour of labour

  output per day/hour/week

  output per machine

  unit cost (total cost/output) - falling ratio indicate efficiency was improving
• why is achieving high productivity important

  efficiency means lower cost goods than competitors

  businesses can either make larger profit margins than competitors or offer customers lower prices while making good profit

  helps maximise return on investment of production assets e.g. factory and machines
• how can a business try to improve its productivity

  • training - improve worker skills that will help them work more productively
  • motivation - motivated employees tend to work more productively
  • better quality raw materials or better capital equipment reduce wastage of time and materials
  • improved organisation of production e.g. less wastage
• productive efficiency


  a firm is productively efficient when it is operating at the lowest point on its average cost curve i.e. unit costs minimised
• productive efficiency

  exists when producers minimise the wastage of resources

  relates to when an economy is on their PPE

  economy is productively efficient if it can produce more of one good only by producing less of another
• productive efficiency

  assume most real firms face downward sloping demand (AR) curve and MR fall at twice the rate

  occurs where ATC is at its lowest and equal to MC

  
• dynamic efficiency


  when businesses supplying the market successfully meet our changing needs and wants over time

  innovation is the 'commercially successful exploitation of ideas' - has demand and supply side effects in markets and the economy as a whole
• dynamic efficiency - productive innovation

  small scale and frequent subtle changes to characteristics and performance of a good or service

  common in consumer product markets e.g. electronics and communications
• dynamic efficiency - process innovation

  changes to the way production takes place or is organised

  new production techniques applied to an existing product (very common in car industry)

  changes in business models and pricing strategies
• Austrian economist Joseph Schumpeter used the term 'gales of creative destruction' to describe the upheaval of the established order in the pursuit of innovation

  smaller disruptive businesses often challenge existing firms with market power
• dynamic efficiency - sustaining innovations

  many new products are similar or incremental to an existing product e.g. new version of an app or introducing electric cars
• dynamic efficiency - disruptive innovations

  Uber is a challenge to the power of established firms such as London Black Cabs
• X-inefficiency

  concept that was originally applied to management efficiencies by Harvey Leibenstein in the 1960s

  occurs when the output of firms, from a given amount of input, is the greatest it can be

  likely toa rise when firms operate in a highly competitive market where managers are motivated to produce as much as possible

  
• when does x-inefficiency occur

  • lack of competition - when markets are less than perfectly competitive like in oligopolies and monopolies, output is not maximised due to lack of managerial motivation
  • in the public sector due to to wasteful spending and sup-optimal supply of key public services
  • state owned organisations if they are set politically motivated targets
  • patents if firms think they are legally protected from competition
  • firms where there is clear principle-agent problem
  • firms may choose to source their factor inputs from higher-priced suppliers if there's no competition
• market failure and lost efficiency

  market failure is when the price mechanism leads to an inefficient allocation of resources and a deadweight loss of economic welfare

  • externalities
  • public, merit and de-merit goods
  • information failure
  • monopolies
  • immobility of factor inputs
• pareto optimality

  where it is not possible for individuals, households or firms to bargain or trade in such a way that everyone is at least as well off as they were before and at least one person is better off