1. Dynamic efficiency

2. Defined
Efficiency over time. New products, techniques and processes which increase efficiency and lower the unit cost of production.

3. The range of outputs in imperfect competition
MR =MC (profit maximisation)
MR=0 (revenue maximisation)
AR=MC (welfare maximisation/ allocative efficiency, the point at which the cost of producing the extra unit is equal to the revenue the firm receives from that extra unit. Alternatively the cost of the resources used to produce that extra unit is equal to the price charged for that unit).
AR = ATC (normal profit, the minimum price a monopolist will accept in order to stay in the market. P MC
ATC
D=AR MR A B C D Q

4. A monopolist is unlikely to be statically efficient (cont)
Monopoly and efficiency
‘Dead weight loss’
A monopolists is not regarded as allocatively efficient for it does not operate at MC=AR (welfare maximisation).
Also at PM it is able to extract much of the consumer surplus through higher prices (area above PM).
There is considerable producer surplus (area below PM)
A perfectly competitive market achieves allocative efficiency for it operates at MC=AR
Lower prices provides for a greater area of consumer surplus (area above PC, more money in consumer’s pockets)
Some of the producer surplus is gained (area below PC, less money in business’ pockets.
The area ABC is the consumer and producer surplus lost in monopoly. It is referred to as the dead weight loss. P MC A PM B PC C
D=AR MR QM QC Q

5. Monopoly and efficiency
A monopolist is unlikely to be statically efficient, but can achieve dynamic efficiency
Monopoly and efficiency
Reinvesting profits
By reinvesting profits that come from the super normal profits made at PM into new plant and machinery, new products and processes production costs are reduced. The MC curve becomes more shallow to give MC1.
The monopolist still adopts a profit maximisation output at QM1 where MR = MC1. In this case however, a lower price is attained than that achieved than in a perfectly competitive market.
How is this possible?
Monopolies can make profits in the long run that can than be reinvested in making the business more efficient. P MC PM PC
PM1
MC1
D=AR MR
QM1 QM QC Q

6. In competitive markets profits are the key to non price competition.
A firm in a competitive market may not be able to increase prices in order to increase profit levels due to the elastic nature of its PED. It will however look to increase profits through lower the cost of production, that is by achieving dynamic efficiency
Reinvesting profits
By reinvesting profits that come from the super normal profits made at P into new plant and machinery, new products and processes production costs are reduced. The MC curve becomes more shallow to give MC1.
The business still adopts a profit maximisation output at QM1 where MC1 =MR. In this case however, a lower price is attained than that achieved than in a perfectly competitive market.
Why may firms pursue this?
In competitive markets profits are the key to non price competition. P MC P
Pde
MC1
D=AR MR Q
Qde Q