Efficiency Analysis Year 2 Micro (12)

Allocative Efficiency?

Where demand = supply. Maximising society surplus (both for consumer and producer), At D = S and in business diagram P(AR) = MC

What is it for the consumer if the business if being allocatively efficient?

1) Resources are following consumer demand (they get what they want)

2) Low prices

3) Maximisation of consumer surplus due to low prices

4) High choices

5) High quality as more competitive

What is it for the producer if the business if being allocatively efficient?

1) Retain or increase market share

2) Stay ahead of rivals

3) Increase profit as more consumers come to them

Productive Efficiency?

Maximising output of the lowest possible average cost. Full exploitation of economies of scale. At lowest point of AC which is MC = AC

What is it for the consumer if the business if being productively efficient?

1) Lower prices: If lower AC is passed to consumer than lower prices

2) Higher consumer surplus

3) Full exploitation of economies of scale

What is it for the producer if the business if being productively efficient?

1) More production and lower costs

2) Higher profits

3) Lower prices means stay ahead of rivals and increase market share for long term

Dynamic Efficiency?

Reinvestment of supernormal profit into RnD and new tech and innovation, to lower LRAC. Supernormal profit needed in the Long run.

What is it for the consumer if the business if being dynamic efficient?

1) New innovative products

2) Lower prices over time as new machinery exists as lower costs can then be transferred to consumers

3) High consumer surplus as more innovative products.

What is it for the producer if the business if being dynamic efficient?

1) LR profit max: stay ahead of rivals as continued investment and high profits by coming up with new products

2) Lower costs overtime

3) Retain and increase market share

4) Stay ahead of rivals and competition ( gain patents or licenses preventing people from copying you and create monopoly power).

X-Efficiency?

production with no waste (no excess costs above AC). Production on any point of AC curve, any point above will be wasteful.

What is it for the consumer if the business if being x-efficient?

1) Low prices if low costs are passed on to consumers

2) Higher consumer surplus

What is it for the producer if the business if being x-efficient?

1) Lower costs

2) Higher profit

3) Lower prices to consumer passed on and retain market share to stay ahead of rivals