Types of efficiency (3.4.1)

What is efficiency and how is it used?

Efficiency is when all goods and factors of production are allocated to their most valuable uses, and is used as a way to assess businesses. If businesses are inefficient, this is bad as it leads to higher costs, lower societal surplus and decreased innovation.

What is productive efficiency?

Productive efficiency is when AC is at its lowest, or when MC=AC. This is where resources are used to give the maximum possible output at the lowest price

What is allocative efficiency?

Allocative efficiency is when P(AR)=MC. This is the point when social welfare is maximised.

What is x-ineffiency?

X-inefficiency is when firms produce at a cost above the AC curve and higher than their potential AC.

What is dynamic efficiency?

When, in the long run, a firm reinvests their profits into R&D to improve their technology and increase their productivity and efficiency over time.

What is the difference between static and dynamic efficiency?

Static efficiency refers to the level of efficiency at one point in time and is based on resource allocation, whereas dynamic efficiency is based on long run improvements in a firms technology.