Types of efficiency

What are the four types of efficiency?

• productive efficiency

• allocative efficiency

• x-efficiency

• dynamic efficiency

What is productive efficiency?

when average total cost is at its lowest.

The condition for productive efficiency is:

MC= AC

When a firm is productively efficient, what quantity will it produce at?

where average cost is lowest so Qprod

When a firm is productively efficient, what price will it produce at and why?

Where MC= AC so Pprod because you stack up to the AR curve

What is allocative efficiency?

where welfare is maximised

When does allocative efficiency occur and represent on a diagram?

When MC= price (AR)

Why does allocative efficiency mean demand will be met?

MC= price

Price is AR so= demand

How does MC= demand?

What is x-inefficiency?

when a firm is producing above its average cost curve for a given level of output.

What is the label of the X-inefficiency?

What is dynamic efficiency?

How changing technology improves a firms output efficiency over time.

To become dynamically efficient and innovate with new technology, firms need to invest into research & development (R&D).

So firms can only be dynamically efficient if:

They are making supernormal profit, AR is greater then AC