Economic Efficiency 3.4.1

What is meant by efficiency in economics?

Efficiency is about society making optimal use of our scarce resources to help satisfy changing wants and needs.

When is allocative efficiency reached?

When no one can be made better off without making someone else worse off.

What is allocative efficiency also known as?

Pareto efficiency/ Pareto optimality.

When does allocative efficiency occur?

When the value that consumers place on a product (reflected in the price they are willing and able to pay) equals the marginal cost of factor resources used up in production.

What is the condition required for allocative efficiency in a market?

Price = Marginal cost of supply

What happens at the output of allocative efficiency?

Total consumer welfare is maximised.

What is productive efficiency?

A state where a company is producing goods or services at the lowest possible average cost, using the fewest possible resources.

Where is productive efficiency achieved?

At an output that minimises the unit cost (AC) of production.

MC = AC

What is dynamic efficiency?

The ongoing adaption and improvement of products, services, and processes to meet changing market demands and conditions.

What is the main aim of dynamic efficiency?

Long term growth and development.

How can a company remain competitive in the long run using dynamic efficiency?

Have the ability to respond to market changes, innovate, and improve over time.

What is the goal of global dynamic efficiency?

To create sustainable growth and value for the company and its stakeholders.

What are three examples of dynamic efficiency?

• Technology- cloud computing, AI have increased efficiency and productivity.

• Healthcare- electronic health records, telemediation streamline processes, minimises errors and improve patient outcomes.

• Renewable energy- solar/ wind power leads to major efficiency improvements.

What is process innovation?

Refers to the improvement of existing processes or the development of new ones to increase efficiency and productivity

What are 3 examples of process innovation?

• Lean manufacturing

• Just-in-time production

• Automation

What is lean manufacturing?

Eliminating waste and streamlining production processes to improve costs and lower costs.

What is just-in-time production?

system where companies produce products only when there is demand, rather than stocking up inventory, This helps reduce waste and improve efficiency.

What is automation?

The use of technology and machines to perform tasks such as assembly line work, which can reduce errors and increase productivity.

What is the theory of ‘creative destruction’?

It states that innovation and technological change lead to the replacement of old technologies and products with new ones, leading to economic growth and progress.

Who came up with the ‘creative destruction’ theory?

Joseph Schumpeter

What are some examples of creative destruction?

• airbnb

• Netflix

• Chat GPT

• Uber

• Deliveroo

What are drivers for innovation?

• Legal protection of intellectual property rights.

• Skilled inward migration/ diverse labour force.

• Investment in human capital.

• Cultural factors such as attitudes to risk-taking.

• Strong university sector/ science parks.

• Tax incentives for research and development.

• Competitive (contestable) markets.

• Open (global) trade in goods and services.

• Financial sector reform.

What is static efficiency?

The optimal allocation of resources at a specific point in time.

What is X-inefficiency?

Inefficiency that is not caused by the economy being in a static state.

What does X-inefficiency lead to in the public sector?

Wasteful spending and a sub-optimal supply of key public services.

What are some causes of X-inefficiency?

• Businesses happy to satisfice profits rather than optimise.

• Some state owned businesses might be politically motivated.

• Patents since legal protection can lead to firms believing they are immune from day-to-day competition.

• In firms where there is a clear principle agent problem where management are pursuing alternative objectives to shareholders who do not monitor their decisions in detail.

• Without competition, firms might source from higher priced suppliers.