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Costs, Revenues and Profits

Efficiency

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on dynamic efficiency, Pareto efficiency, Pareto improvement and X-inefficiency.

What you need to know

Answer each one before you reveal it.

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Key term

State the condition for productive efficiency for the economy as a whole.

Key term

What does allocative efficiency mean, and which condition identifies it?

Key term

On a production possibility frontier, how many points are productively efficient and how many are allocatively efficient?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What does it mean for a firm to be productively efficient?

    Model answer

    It produces at the lowest point of its average cost curve, so each unit of output is made at the lowest possible cost.

  2. 2

    State the condition for productive efficiency for the economy as a whole.

    Model answer

    The economy is productively efficient when it operates on its production possibility frontier, so no more of one good can be produced without producing less of another.

  3. 3

    What does allocative efficiency mean, and which condition identifies it?

    Model answer

    Resources are allocated in line with consumer preferences, and this occurs where price equals marginal cost.

  4. 4

    On a production possibility frontier, how many points are productively efficient and how many are allocatively efficient?

    Model answer

    Every point on the frontier is productively efficient, but only one of them is allocatively efficient, namely the combination that best matches society's preferences.

  5. 5

    Can a firm be productively efficient yet allocatively inefficient? Explain.

    Model answer

    Yes, because it may produce at minimum average cost but at an output where price exceeds marginal cost, so it makes the wrong quantity very cheaply.

  6. 6

    Define dynamic efficiency.

    Model answer

    Dynamic efficiency is improvement in efficiency over time through investment, innovation and new technology, which lowers costs and creates better products.

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