theme 3 : productive efficiency

what is productive efficiency

• refers to a firms costs of production

• can be applied both to the short and long run

• achieved when the output is produced at minimum average total cost

how do we find productive efficiency on a graph

• where MC = AC

• where marginal cost curve cuts average cost curve

what is dynamic efficiency

• concerned with the productive efficiency of a firm over a period of time

a firm which is dynamically efficient will be …

• reducing its cost curves by implementing new production processes

• may also involve implementing better working methods and better management of human capital

what is x inefficiency

• occurs when a firm has little incentive to control costs

• causes the average cost of production to be higher than necessary

• when there is this lack of incentives to minimise AC

causes of x inefficiency

• monopoly power - monopoly faces little or no competition, therefore might be easy for the monopolist to make supernormal profits, therefore in the absence of competitive pressures, they may not try very hard to control costs

• state control - nationalised firm owned by the gov may face little or no incentive to try and make profit, therefore it has less incentive to try and cut costs