Efficiency

Question 1

What is productive efficiency?

Answer 1

Productive efficiency occurs when a firm operates on the lowest average costs (lowest point on AC curve).

Question 2

Do firms operate at productive efficiency?

Answer 2

No-firms rarely lower the price to equal average costs.

Question 3

Where does productive efficiency occur?

Answer 3

Where price = MC & AC -MC = AC because MC always cuts the AC curve at its lowest point

Question 4

Define allocative efficiency.

Answer 4

Allocative efficiency is where the price = marginal cost (P=MC). It means people paying the exact amount it costs to produce the last unit.

Question 5

What does efficiency mean?

Answer 5

The measure of how well resources are used. That is the output relative to other factors such as costs.

Question 6

Define X-inefficiency.

Answer 6

This occurs when costs rise as there is little or no competition.

Question 7

Give an example of X-inefficiency.

Answer 7

If wages and employment are not dependent on revenues the workers might not work as hard to raise the volume of sales.

Question 8

Explain the price points on the diagram.

Answer 8

P1=profit maximisation (MR=MC)

P2=allocative efficiency (P=MC)

P3=productive efficiency (Lowest point on AC)

Question 9

Draw & explain the graph for X-inefficiency using an example.

Answer 9

Wages and employment are not based on productivity so workers relax & fail to meet productivity targets raising labour costs.