Economic efficiency flashcards

what are the 4 types of efficiency

1. allocative efficiency

2. productive efficiency

3. dynamic efficiency

4. X-efficiency

what is productive efficiency?

when average costs are at the lowest point

where is productive efficiency shown on a diagram?

where MC = AC

what is allocative efficiency?

when social welfare is maximised

where is allocative efficiency shown on a diagram?

where MC = AR (also symbolises Price and Demand)

What is X - inefficiency

when a firm is producing above its AC curve for a given level of output

what is dynamic efficiency

how changing technology improves a firms output potential over time

what must firms do to become dynamically efficient?

invest supernormal profits into innovation and R&D projects

How may dynamic efficiency be represented in a diagram?

if AR > AC, firms will have supernormal profits to invest