5.10 - MARKET STRUCTURE, STATIC AND DYNAMIC EFFICIENCY, RESOURCE ALLOCATION

5.10 - MARKET STRUCTURE

• level of efficiency at one point in time. productive and allocative efficiencies are examples
• firms minimise average total costs. produce at lowest point on average cost curve. since MC curve cuts AC curve at lowest point, MC = AC is a point of productive efficiency. all points on the PPF curve are productively efficient.
• resources distributed to goods and services that consumers want. maximises utility. exists at P = MC, means that consumers pay for value of marginal utility they derive from consuming good or service. free markets considered to be allocatively efficient.
• producing within AC boundary. costs higher than would be with competition in market. could be due to organisational slack, waste in production process, poor management, or laziness. monopolies tend to be x-inefficient, since have little incentive to lower average costs because of lack of competition
• STATIC EFFICIENCY
• PRODUCTIVE EFFICIENCY
• ALLOCATIVE EFFICIENCY
• X INEFFICIENCY

Slide 2

• concerned with new technology and increases in productivity, which causes efficiency to increase over a period of time. influenced by research and development, investment in human and non-human capital and technological change. when all resources are allocated efficiently over time, and rate of innovation is at optimum level, which leads to falling long run average costs. market is dynamically efficient if consumer needs and wants are met as time goes on. related to rate of innovation, might lead to lower costs of production in future, or creation of new products. affected by short run factors such as demand, interest rates and past profitability. short run costs might be increased in order to cause long run costs to fall. can be evaluated by considering long time lag between making an investment and having falling average costs and by considering how factors change in long run. some firms will face trade-off between giving shareholders dividends and making investment
• DYNAMIC EFFICIENCY