Definitions of market dominance

What are the three methods to achieve economic efficiency?

1. Dynamic efficiency

2. Allocative efficiency

3. Productive efficiency

Define economic efficiency

To get the most out of scarce resources and to avoid wastage.

How do we define when resources are being used efficiently?

Pareto efficiency: When it is impossible to reallocated resources to make anyone better off without making somebody else worse off.

In simpler terms, what does productive efficiency (PE) mean + definition

“How to produce”

Whatever output is being produced is being produced at the lowest possible average cost (MES of the LRAC curve)

From firms’ POV, how is PE achieved?

Able to produce on any point of the LRAC; any point on the LRAC represents minimum cost for producing a particular level of output.

(It follows that profit maximising firms are already PE, as they will produce a given level of output at the lowest possible cost)

From society’s POV, when is PE achieved?

When firms produce at the output with the lowest possible cost (minimum point on LRAC/on the MES), then the firm has exploited all iEOS and hence no resources are wasted.

In simpler terms what does allocative efficiency (AE) mean + definition

“What and how much to produce”.

Achieved when resources are allocated in a way to produce the goods and services most wanted by society.

In term of AE, what does price (P) reflect to consumers?

Valuation of the marginal benefit of consuming a good or service

In terms of AE, what does the seller’s marginal cost (MC) mean?

Measures the cost of using resources to produce one more unit of the good

In terms of AE, when is AE achieved?

P = MC (socially optimal; neither overproduction or underproduction)

When the level of output achieved corresponds to P = MC (assuming no externalities), resources cannot be reallocated to increase consumer satisfaction

Why is P < MC not allocative efficient?

Additional cost used to produce the last unit of good is higher than consumer valuation.

Too many units of the good ends up being produced, which could have been diverted to another industry.

Why is P > MC not allocative efficient

Consumer valuation of the good is worth more than the additional costs to produce it; under-allocation leads to too little units of the good from being produced (consumers willing to pay more), more resources should be diverted to produce this good

In simpler terms, what does dynamic efficiency (DE) mean + definition

“Innovation”

Achieved when forms are technologically progressive to reduce the average costs of production and/or meet the changing needs and wants of consumers over time.

—> impacts product choices, quality, variety and costs.

To achieve dynamic efficiency, it is dependent on firms’…

1. Incentive to innovate — level of completion and contestability in the market

2. Ability to innovate — depend on ttype of profit being earned in LR

How can firms be more dynamic efficient?

• Invest in R&D

  • product innovation to produce better quality products/new products

  • process innovation to carry out new production methods

Limitation of firms engaging in way to achieve dynamic efficiency

Uncertainty of R&D efforts; dabbling into the unknown

Define Consumer Welfare

Individual benefits derived from the consumption of goods and services.

What does consumer welfare consist of?

1. Consumer choice

2. Quality of products

3. Consumer surplus

Define consumer choice

Criteria: Whether firms produce products that are differentiated from one another

Consumer choice: Wide range of styles, brands, and quality differences for a product

Define quality of products

Determines how much satisfaction consumers can derive from it when enjoying the g&s

Define consumer surplus

The price at which consumers are willing and able to pay for the good or service, subtracted by the actual price paid.

—> larger the consumer surplus, higher the welfare of consumers