Economic efficiency is regarded by many students as a dry topic which is difficult to relate to the real world. But it is worth getting to grips with because once you understand the ideas, you can use them to good advantage when discussing – for example – the effects of government intervention.

• Are markets working well in allocating resource optimally?
• Are businesses producing close to the lowest possible unit cost and with minimum waste?
• In a given industry, is there sufficient dynamic efficiency driven by research and innovation?
• Does a market take into account external costs and benefits to reach a position of social efficiency?

These are the main questions in this section.

Key Definitions

1. Allocative efficiency: Occurs when the price is equal to the marginal cost (AR=MC or P=MC)
2. Productive efficiency: Occurs when output is supplied at minimum unit (average) cost either in the short or the long run
3. Dynamic efficiency: Dynamic efficiency focuses on changes in the choice available in a market together with the quality/performance of products that we buy. Economists often link dynamic efficiency with the pace of innovation in a market

Revision Video: Market Structures and Economic Efficiency