1a kno how on efficiency
- 1. Unit 3 Kno-how! on efficiency
- 2. Efficiency Background Reading: Nutter A2 micro book (2nd ed) p. 67-70 Student Unit Guide (old ed / new ed) p.18 / p.12 Students should be able to: Understand that a market is productively efficient when output is produced at lowest possible average cost. Understand that a market is allocatively efficient when output is produced at a price paid by consumers that is equal to the marginal cost incurred in producing that output
- 3. What is Economic Efficiency? There are limited resources available to produce the goods & services to satisfy our wants such as, for example, our insatiable demands for healthcare. Economic efficiency is about finding the best or optimal way to satisfy most wants or at least the most important wants.
- 5. Static Efficiency Most A2 economic analysis is about static efficiency, eg how much output can be produced from our resources at any one point of time.
- 6. Productive Efficiency Minimising the unit cost of any quantity of output. As a result of scarcity, productive efficiency implies minimum resources (land, labour and capital used up in production, leaving more for other uses. Profit motive also encourages productive efficiency because profit is revenue minus costs.
- 7. Productive Efficiency MC = AC diagram here
- 9. Productive Efficiency Productive Efficiency means exploiting all potential internal economies of scale Can also be achieved through re-organisation (e.g. to cell production), investment in new technology, training for staff
- 10. Allocative Efficiency Students should be able to: Understand that a market is allocatively efficient when output is produced at a price paid by consumers that is equal to the marginal cost incurred in producing that output
- 11. 4.6 Allocative Efficiency Market forces should ensure that the prices that consumers will pay reflect the benefits (satisfaction / utility) they expect from consumption (law of equi-marginal returns). Most consumers gain a surplus, with the consumer deriving just enough marginal benefit (MU) from the last unit consumed to justify paying the price (AR) which should cover the marginal cost of production (MC). Thus the benefit (MU or AR or price) justifies the cost in terms of resources used up.
- 12. 4.6 Allocative Efficiency MC = AR DJ MC is AR Allocator Remember AR = PRICE and PRICE = MU MC (the cost of the resources used to generate the good/service) = AR or p or MU the value placed on the product by the buyer.
- 14. Dynamic Efficiency Dynamic efficiency occurs in a market over time and is concerned with the effects of investment and improvement of operations. A dynamically efficient firm may invest more profit back into R&D, staff training and new equipment rather than dividend payments. This might reduce future costs and increase future profits.
- 15. Technical Efficiency Productive efficiency requires technical efficiency whereby, at a given quantity of output, the combination of factors of production used minimises inputs. Which is the appropriate short-run cost curve (combination of factors of production) that is appropriate for that level of output. See PJV’s fishing example.
- 17. Other types of efficiency - X – inefficiency X – inefficiency how far from being (productively & allocatively) efficient a firm is because the market situation they are in (such as monopoly) does not provide enough incentives to become more efficient. See section of regulation of privatised monopolies.
- 18. Other types of efficiency – Pareto efficiency Pareto efficiency A situation where no one economic agent can be made better off without making another worse off.
- 19. Other types of efficiency – Distributive efficiency Distributive efficiency A situation where goods produced are distributed precisely to those desiring them.
- 20. Other types of efficiency – Social efficiency Occurs where social marginal benefit = social marginal cost. Differs from private or internal costs and benefits due to externalities (see unit 2)
- 21. Issues for evaluation Allocative efficiency ignores distribution issues (willingness to pay is based on income as well.) market failure factor immobility less than perfect markets where price > marginal cost.