3.4.1 Efficiency

EFFICIENCY USE

• can be used to judge how well market allocates resources and relationship between scarce inputs and outputs

TYPES OF EFFICIENCY

• allocative efficiency

• productive efficiency

• dynamic efficiency

• x-inefficiency

ALLOCATIVE EFFICIENCY

• achieved when resources are used to produce g and s which consumers want and value most highly and social welfare is maximised

• will occur when value to society from consumption is equal to marginal cost of production, where P=MC

PRODUCTIVE EFFICIENCY

• when its products are produced at the lowest AC so the fewest resources are used to produce each product

• min resources are used to produce max output

• can only exist if firms produce at bottom of AC curve, in short run this is where MC=AC

• only possible if there is technical efficiency, where a given output is produced with minimum inputs

DYNAMIC EFFICIENCY

• achieved when resources are allocated efficiently over time

• concerned w/ investment, which brings new products and new production techniques

• will be achieved in markets where competition encourages innovation but where there are diffs in products and copyright/patent laws

• SNP is required to provide firms with the incentive to invest and the ability to do so

X-INEFFICIENCY

• if a firm fails to minimise its AC at a given level of output- X-inefficient

• specific type of productive inefficiency as it occurs when they fail to minimise their cost for that specific output

• often occurs where there is a lack of competition so firms have little incentive to cut costs