3.4.1 Efficiency

Used to examine different types of market structure

What is allocative efficiency

• When firms allocate resources as efficiently as possible → value that consumers place on a good = cost of resources used in producing the good

• AR (P) = MC

What is productive efficiency

• operate at the lowest average cost

• MC = AC (the lowest point on the AC curve)

What is dynamic efficiency

• When firm produces at any output where AR is more than AC → where there is supernormal profit → can re-invest profits to improve product quality / capital stocks 

• Super-normal profit increases, dynamic efficiency increases

What is x-inefficiency 

Occurs when a lack of competition → reduces incentive for a firm to behave as efficiently as possible → costs higher than they would be with competition

This lack of competitive pressure → managerial slack

Long term patents can cause this:

• patents = act a legal barriers as it prevents copying of names/concepts by rival firms → barrier to entry → new firms cannot enter → lack of competition

When firms are operating at prof.max

cannot be productively & allocatively efficient at the same time