This study resource provides an updated collection of short revision videos on the topic of economic efficiency.
Efficiency is about a society making optimal (best) use of scarce resources to help satisfy our changing wants & needs
There are several meanings of efficiency, but they all link to how well a market system allocates scarce resources to satisfy consumer needs & wants.
Normally the price mechanism is good at allocating inputs, but there are many occasions when the market can fail.
What is allocative efficiency?
Allocative efficiency is reached when no one can be made better off without making someone else worse off. This is known as Pareto efficiency / optimality
Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the marginal cost of the scarce factor resources used up in production.
Productive efficiency exists when producers minimize the wastage of resources
Productive efficiency is achieved at an output that minimizes the unit cost (AC) of production
This can apply to both the short-run and the long-run. In the long-run, this is achieved at the minimum efficient scale (MES).
Dynamic efficiency occurs over time and is strongly linked to the pace of innovation within a market and improvements in the range of choice for consumers and the performance / reliability / quality of products.
X-inefficiency happens when a lack of effective or real competition in a market or industry means that average costs are higher than they would be with competition.
Allocative efficiency: Producing what is demanded by consumers at a price that reflect the marginal cost of supply
Dynamic efficiency: Changes in the choices available together with the quality/performance of products we buy. Dynamic efficient is linked closely to the rate of innovation/invention
Pareto optimality: Where it is not possible for households, or firms to bargain or trade in such a way that everyone is at least as well off as they were before and at least one person is better off
Productive efficiency: Producing an output at lowest feasible average cost. This is at an output where AC=MC either in short run or long run (at minimum efficient scale)
X-inefficiency: A lack of real competition may give a monopolist a weakincentive to invest in new ideas or consider consumer welfare. Average costs drift higher as a result.
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