1a kno how on efficiency
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Transcript of 1a kno how on efficiency
Unit 3
Kno-how! on efficiency
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
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.
Types of Efficiency
Static
Productive
Allocative
Dynamic
Technical
X-efficiency
Pareto
Social
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.
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.
Productive Efficiency
MC = AC diagram here
Productive Efficiency
MC = AC
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
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
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.
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.
Allocative Efficiency
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.
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.
Technical Efficiency
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.
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.
Other types of efficiency – Distributive
efficiency
Distributive efficiency
A situation where goods produced are
distributed precisely to those desiring
them.
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)
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.