Efficiencies

Question 1

At what point is Allocative Efficiency?

Answer 1

MC = AR (= P)

Question 2

What is Allocative Efficiency?

Answer 2

When the value of the additional resources = the marginal benefit for consumers from this additional unit of output (welfare maximising)

Question 3

What is MC>AR (allocative efficiency)

Answer 3

The resources used have value subtracted
- the additional unit of output costs more than consumers are willing to pay (over allocation, waste of scarce resources)

Question 4

What is MC

Answer 4

The price consumers are willing to pay is less than the cost
- each unit is adding welfare, as you get to AR=MC, welfare continues to be added but by less each time (still welfare is rising)

Question 5

At what point is Productive Efficiency?

Answer 5

ATC = MC (where ATC is minimised, which happens to be where it meets MC)

Question 6

What is Productive Efficiency?

Answer 6

The level of output where ATC is minimised, the firm is using the fewest resources possible (per unit of output of output on average)

Question 7

What is X-inefficiency?

Answer 7

Occurs when a lack of competition pressures result in an organisational slack

Question 8

What is Organisational Slack?

Answer 8

Inefficiencies in terms of management/production decisions that don’t minimise costs

Question 9

What is the principal-agent problem?

Answer 9

When agent makes decisions on behalf of principal they won’t always take into account the best interests of the firm.

Question 10

What is Divorce of ownership?

Answer 10

The need for experts in specialist roles (legal experts, supply-chain, marketing-experts, scientists)

Question 11

What are examples of the principal-agent problem?

Answer 11

• Shortcuts in decisions
• Riskier behaviour
• Long breaks
• Hire more workers than necessary
• Relaxing on rules/regulations

Question 12

What is dynamic efficiency?

Answer 12

Changes in static efficiencies over time, normally derived from investment, which in turn result in innovation

Question 13

What does a change in future productive efficiency mean?

Answer 13

If the firm invests in new production techniques (better capital), then the firm is likely to become more productively efficient over time

Question 14

What does a change in future allocative efficiency?

Answer 14

Investment into new product development = increased quality products = increase welfare.
This could be seen as an improvement in allocative efficiency in the future as total welfare might increase as a result.

Question 15

What does dynamic efficiency rely on? (2)

Answer 15

• Incentive to invest/innovate (competitive pressures)

- Ability to invest/innovate (Profits, borrow, investors, donors)

Question 16

Are perfectly competitive markets allocatively efficient?

Answer 16

Yes, it is the only market where firms acting in their own self interest are allocatively efficient (MC = AR)

Question 17

Are perfectly competitive markets productively efficient?

Answer 17

Yes, firms are price takers so can only work at the point where AC is minimised (ATC = MC)

Question 18

Are perfectly competitive markets X-inefficient?

Answer 18

No, there is the highest degree of competitive pressures and no space for organisational slack

Question 19

Are perfectly competitive markets Dynamically efficient?

Answer 19

Yes incentive to invest (can good be improved?)

but no ability to (can borrow)

Question 20

Is a monopoly allocatively efficient?

Answer 20

No, firms want to profit max by putting Q at MC=MR

Question 21

Is a monopoly productively efficient efficient?

Answer 21

It can be, depends on where the curves end up

Question 22

Is a monopoly X-inefficient?

Answer 22

Could be since they are large firms and can often absorb the costs of organisational slack and there aren’t competitive pressures

Question 23

Is a monopoly dynamically efficient?

Answer 23

Yes has the ability to invest

but not always the incentive (depending on the industry)

Question 24

Is a monopolistic competition allocatively efficient?

Answer 24

No, in both LR and SR because there is some degree of price making ability

Question 25

Is a monopolistic competition X-inefficient?

Answer 25

SR: scope for organisational slack (but dont want to erode into normal profits)
LR: No scope for organisational slack

Question 26

Is a monopolistic competition dynamically efficient?

Answer 26

Incentive? Yes (to maintain SR supernormal profit)
Ability?
SR: got supernormal profits so yes
LR: normal profit so no