3.4 Market Structures

Allocative efficiency

The right amount of a good is being produced exactly matching what consumers want

Productive efficiency

Occurs when production happens at the lowest point on the AC curve, meaning the firm is producing at minimum possible cost with no waste of resources

Dynamic efficiency

Efficiency over time, where firms use supernormal profits to invest in innovation, new technology, and improved products, reducing future costs and improving quality

X-inefficiency

When firms operate above the lowest possible cost level because weak competitive pressure allows waste, managerial slack, or unnecessary spending

Efficiency in perfect competition

Allocatively & productively efficient in the long run, but weak dynamic efficiency. 

Efficiency in monopolistc competition

Not allocatively or productively efficient; dynamic efficiency limited due to low overall profits. 

Efficiency in monopoly

Allocatively inefficient and often productively inefficient, but can be dynamically efficient due to supernormal profits. 

Efficiency in oligopoly

Efficiency varies; can be dynamically efficient if firms compete on innovation, but may become allocatively inefficient if collusion raises prices.