Efficiency

Question 1

What is allocative efficiency for a firm

Answer 1

Where resources follow consumer demand and society surplus and net social benefit is maximised (i.e. consumer and producer surplus is maximised)

Question 2

Where does allocative efficiency occur for a firm

Answer 2

Where demand = supply so AR = MC so P = MC

Question 3

How does allocative efficiency impact consumers

Answer 3

1. Resources follow consumer demand so consumers are getting exactly what they want in the quantity they want
2. Get lower prices than profit max for example
3. Consumer surplus is being maximised
4. Lots of choice for consumers as the market produces the types and quantities of goods that consumers want
5. Higher quality products if that is what consumers are demanding

Question 4

How does allocative efficiency impact the producer

Answer 4

1. Retain/ increase market share as they are producing at a lower price, allowing the firm to stay ahead of rivals
2. Could increase profit in the long term as they have more consumers who will be loyal

Question 5

What is productive efficiency for a firm

Answer 5

The maximisation of output at the minimum possible average cost as the firm is fully exploiting their economies of scale (MES)

Question 6

How does productive efficiency impact consumers

Answer 6

Firms are fully exploiting their economies of scale to minimise AC so consumers are getting lower prices and this means they are getting high consumer surplus (not max but still high)

Question 7

How does productive efficiency impact producers

Answer 7

1. More production at lower costs, leading to higher profits
2. Lower costs could be passed on to consumers in the form of higher prices, leading to higher market share

Question 8

What is X efficiency for a firm

Answer 8

Where the firm is producing at any point on the AC curve as the AC curve is the lowest possible cost at that level of output so there is no waste

i.e. the firm may not be large enough to be productively efficient as they cannot fully exploit economies of scale but even at lower quantities they should be minimising AC

Question 9

How does X efficiency impact consumers

Answer 9

No waste of resources means lower prices so high consumer surplus

Question 10

How does X efficiency impact producers

Answer 10

1. Lower costs means higher profit
2. Firm can pass on lower prices to consumer, increasing/retaining market share

Question 11

Where would a firm that is X inefficient produce

Answer 11

At a point above the average cost curve so there is waste

Question 12

Why would a monopoly be X inefficient

Answer 12

• No competition so monopoly gets complacent and allows waste
• However, still wants to max profit so should still want to be X efficient but they would have to remove staff perks and reduce wages
• Difficult thing for monopolies to do and would make them unpopular so they allow the waste to continue

Question 13

Why would a public sector firm be X inefficient

Answer 13

They want to maximise social welfare instead of maximising profit
Less profit drive leads to less incentive to try be X efficient so waste creeps in

Question 14

What is dynamic efficiency

Answer 14

Reinvestment of long run supernormal profit back in to the business in the form of new/upgraded capital and technology, R&D and new innovation

Question 15

How can you show dynamic efficiency on a diagram

Answer 15

Show area of supernormal profit on curve through (difference between AR and AC) x quantity sold

Question 16

How does dynamic efficiency impact consumers

Answer 16

1. New innovative products
2. Lower prices as investment can lower LRAC which can be transferred to consumers
3. These lower prices and better quality for same price will lead to higher consumer surplus in the long run

Question 17

How does dynamic efficiency impact producers

Answer 17

1. Allows the firm to keep high profits in the long term by stay ahead of rivals through constantly innovating
2. Lowers costs over time to increase profits further
3. Staying ahead of rivals leads to increased market share, especially if the firm is patenting new technology

Question 18

What is the difference between static efficiency and dynamic efficiency

Answer 18

Static efficiency is the optimal conditions that can occur in the current state of the market
i.e. productive, allocative, X

Dynamic efficiency occurs over time