Efficencies

Define the term ‘efficency’

Making optimal use of scarce recourses to satisfy changing wants and needs

Define the term ‘productive efficiency’

Where a firm is operating at the lowest possible average cost, where MC = AC

This means that a firm can produce the maximum output, with its inputs without any waste or inefficiencies

Draw a diagram illustrating Productive efficiency

Define the term ‘allocative efficiency‘

Where P=MC, at this point recourses are allocated in a way in which societal welfare is maximised.

The value that consumers place on a good/service is equal to the marginal costs of factor inputs used in production

Draw a diagram illustrating Allocative efficency

Define the term ‘X-innefficency’

When a firms costs are above the AC curve, for a given level of output

Explain why X-inefficiency may occur

Firms may lack the incentive to control cost’s with slack occurring as a consequence

May occur in an industry with a lack of competition or where the firm is not held accountable for making a loss. This can be state-owned industries if they are set politically motivated targets as this may lead to wasteful spending and suboptimal supply of key services. (EVAL for natural monopolies and nationalisation)

Draw a diagram explaining X-inefficiency

X-efficency may occur which is when a firms costs are above the AC curve, for a given level of output.

This can be state-owned industries if they are set politically motivated targets, and so are not held accountable for making a loss

This may lead to wasteful spending and suboptimal supply of key services.

Therefore, this may create extra costs from productive slack, from C1 to C2

Define the term ‘Dynamic efficiency’ ’

Where changing technology improves a firms productive potential over time

Give three consequences of product innovation

• Improves competitive advantage

• Reduces costs

• Improves quality of goods/services

Give two methods of process innovation

Lean manufacturing: Eliminating waste and streamlining production processes to increase productive efficiency & eliminate costs

Automation: Refers to the use of technology and machines to preform tasks such as assembly line work, which can improve productivity and reduce costs and errors within the productive process

Write out a chain of reasoning for dynamic efficency

An increase in SNP, men’s that firms have increased levels of internal finance made available to them, They may reinvest these profits into R&D in order to improve its existing production processes, such as increased use of automation which is the use of technology and machines to perform tasks such assembly line work which can improve productivity and reduce cost’s within the production processes, allowing for sustainable growth over time, A firm may also engage in product innovation. This can be seen by Apple, when it introduced the IPhone in 2007 where it revolutionised the smartphone industry with its sleek design and touch-screen interface. Apple has been able to further improve its revenue streams, and differentiate itself from its competitors leading to further innovation such as Tablets, Wireless earbuds etc. leading to improvements in consumer welfare as they are able to enjoy these technological products.