Efficiency

Overview of the five areas for topic 3.4 3.4.1 Efficiency 3.4.2 Perfect competition 3.4.3 Monopolistic competition 3.4.4 Oligopoly 3.4.5 Monopoly

Candidates should be able to: Efficiency syllabus Candidates should be able to: Distinguish between productive and allocative efficiency Find the minimum point on the average total cost curve and use the fact that this is the most productively efficient point Use the fact that allocative efficiency occurs where price is equal to marginal cost Define dynamic efficiency Define inefficiency and, in particular, x-inefficiency Assess efficiency/inefficiency in different market structures

Definitions – from A2 Economics Efficiency refers to how well resources are used. Allocative efficiency occurs when price equals marginal cost. What is the formula? Productive efficiency exists when production is achieved at lowest cost (AC are at their lowest point). Formula? Both of these are static in the short term. Dynamic efficiency looks at how, in the long term, new technology and productive techniques can increase the productive potential of firms.

Productive efficiency and PPF – from AS Sketch a PPF What does it show? Points on the curve show that the economy is both ______________ and ________________ efficient. When does allocative efficiency occur? Productive efficiency?: Allocative efficiency is where Productive efficiency is where

Diagram with profit and revenue maximisation Sketch a large diagram with falling price and show MC, MR and AR Where will firms produce if they want to maximise profits? Where will firms produce if they are maximising revenue?

Allocative efficiency Allocative efficiency occurs when the value consumers put on a good equals the cost of producing the good. When price = marginal cost (i.e. MC = ___) then the firm is allocatively efficient. Transferring resources when price is below marginal cost to resources when price is above marginal cost is allocatively efficient. On the next slide, draw a diagram showing falling price, mark on AR, MR, MC and show the allocative efficient output.

Allocative efficiency – sketch MC, AR and MR

Productive efficiency Productive efficiency occurs when output is achieved at the minimum average cost If MC = ATC then the firm is producing at the minimum point on the average cost curve and is therefore productively efficient. Sketch this

Write down the 7 formula without looking them up!

Definitions: x–inefficiency Inefficiency means not obtaining the maximum output from the use of resources and it is costly to the economy X-inefficiency (organisational slack) exists when a firm operates within (rather than on) its average cost boundary. Average costs are higher than they could be. It occurs when a firm incurs ____________________. This could be due to:

x–inefficiency diagram B What does point A show? Point B?