Efficiency

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Efficiency

Efficiency can be separated into static efficiency and dynamic efficiency.

Dynamic efficiency

Dynamic efficiency refers to how efficient a system is over time. It looks at how productivity changes over time.
For dynamic efficiency to be achieved, normally some supernormal profits must be made in the long run. This is because firms need to reinvest profits.

Static efficiency

Static efficiency refers to the efficiency at a point in time.
It is made up of allocative and productive efficiency.
A firm can be statically efficient without making supernormal profits.

X-inefficiency

X-inefficiency happens when monopolies do not feel the need to reinvest their profits to improve their efficiency.
So, they do not produce at their lowest possible cost.
Causes of X-inefficiency include:
- Inefficient use of factors of production.
- Overpaying for factors of production.

Conditions for Efficiency

There are conditions that have to be met for efficiency to be achieved.

Productive efficiency conditions

Productive efficiency means firms are producing at the minimum possible cost.
So they must be producing on the lowest point of their average cost curve.
For productive efficiency, marginal cost (MC) must equal average cost (AC).

Allocative efficiency conditions

Allocative efficiency happens when the benefit gained from the extra unit of the good is equal to the price of it.
So allocative efficiency happens when the marginal utility the consumer gains is equal to the price.
Or when the marginal cost of producing the good is equal to the price.
Allocative efficiency can also be shown by an economy operating at a point on (but not inside) its PPF.

Dynamic efficiency conditions

Dynamic efficiency is changed by factors that affect productivity and improve factors of production.
- E.g investment in human capital might increase the output per worker over time. This is an increase in dynamic efficiency.
Technological change can lead to new processes that are more efficient.
- So, this is a cause of dynamic efficiency.

Outcomes for Consumers in Different Market Structures

The characteristics of a particular market will dictate output, price and the distribution of surplus and welfare.

Perfect competition

Perfect competition is seen as the ideal situation for consumers, at least in the short run.
In perfect competition, no supplier can affect the market price and market quantity of the good or services they produce.
There are no barriers to entry or exit. Every consumer that can pay the market price is able to consume the good or service.

Monopoly

In a free market a monopolist will look to maximise profits and without competition can do that at the point where marginal costs = marginal revenue. This is at a higher price and lower quantity than there would be in a competitive market.
Consumer surplus is lower than in a perfectly competitive market.
But if there are few barriers to entry, then there is an incentive to enter the market and the price could fall. Competitors could reduce prices or innovate to produce a cheaper or better product, which would be good for consumers.

Natural monopoly

Natural monopolies are markets where it is efficient to have either only one provider or one major provider. These are usually markets where there are disproportionately high fixed costs leading to significant economies of scale.
The incumbent in a natural monopoly is at a significant advantage over smaller competitors and potential entrants due to their much lower average costs due to economies of scale.
Because of this, the threat of competition is weak. If competitors entered, because firms would all have higher costs, this may actually be bad for consumers. Prices are higher and consumer surplus lower at lower quantities of output.

Competitive oligopolies

If an oligopoly is competitive firms will compete somewhat on price and product.
The firms are incentivised to invest in research and development which leads to continuous innovation in both product and production further lowering prices and improving quality.
The mobile phone industry is a prime example (Apple, Samsung etc). A small number of large competitive firms who continually work to offer the best product.
In these markets, quantity is higher and price lower than in a monopoly. But consumer surplus is usually lower than in a perfectly competitive market.
In the long-run, the innovation enabled by supernormal profits may make welfare higher, because the market is more dynamically efficient.

Uncompetitive oligopolies

Oligopolies can also be uncompetitive and act like monopolies. - With a small number of firms in the market it is easier to collaborate and collude either explicitly or tacitly. When they collude, firms set prices and output so that the firms share the monopoly profit.
To the consumer, the market can be indistinguishable from a monopoly with higher prices, lower quantity therefore lower surplus and welfare compared to a perfectly competitive market.

Monopolistic competition

Monopolistic competition is where firms are selling unique products but are competing over the same customers.
Each firm has a degree of monopoly power which they earn through providing differentiated products and building their brand.
With differentiated products, consumers face more choice potentially satisfying more wants and needs.

1Introduction to Markets

2Market Failure

2.1Market Failure

2.1.1Types of Market Failure

2.1.2Externalities

2.1.3The Deadweight Welfare Loss of Externalities

2.1.4A-A* (AO3/4) - The Externalities of Education

2.1.5Public Goods

2.1.6Information Gaps

2.1.7End of Topic Test - Market Failure

2.1.8Application Questions - Market Failure

2.2Government Intervention

2.2.1Government Intervention in Markets

2.2.2Subsidies & Price Controls

2.2.3Pollution Permits & Regulation

2.2.4A-A* (AO3/4) - European Emissions Trading

2.2.5State Provision & Information Provision

2.2.6Government Failure

2.2.7End of Topic Test - Government Intervention

2.2.8A-A* (AO3/4) - Government Intervention

3The UK Macroeconomy

3.1Measures of Economic Performance

3.1.1Measuring Economic Growth

3.1.2National Income Data

3.1.3Inflation

3.1.4Causes of Inflation

3.1.5Consequences of Inflation

3.1.6Employment & Unemployment

3.1.7Causes & Impact of Unemployment

3.1.8A-A* (AO3/4) - Hysteresis

3.1.9Balance of Payments

3.1.10Current Account Deficit & Imbalances

3.1.11End of Topic Test - Economic Performance

3.1.12Application Questions Macroeconomy

3.2Aggregate Demand

3.2.1Aggregate Demand

3.2.2Consumption

3.2.3Investment

3.2.4Government Expenditure

3.2.5Net Trade

3.2.6End of Topic Test - Aggregated Demand

3.2.7Application Questions - AD

3.3Aggregate Supply

3.3.1Aggregate Supply

3.3.2End of Topic Test - Aggregated Supply

3.3.3A-A* (AO3/4) -Aggregate Supply

3.4National Income

3.4.1National Income

3.4.2Injections & Withdrawals

3.4.3Equilibrium Level of Real National Output

3.4.4Multiplier Effect

3.4.5End of Topic Test - National Income

3.4.6Application Questions - National Income

3.5Economic Growth

3.5.1Causes of Economic Growth

3.5.2Output Gaps

3.5.3Business Cycle

3.5.4Impact of Economic Growth

3.5.5End of Topic Test - Economic Growth

3.5.6A-A* (AO3/4) - Growth

4The UK Economy - Policies

4.1Macroeconomic Objectives & Policies

4.1.1Possible Objectives

4.1.2Demand-Side Policies - Monetary

4.1.3Demand-Side Policies - Monetary 2

4.1.4A-A* (AO3/4) - The Future of Interest Rates

4.1.5Demand-Side Policies - Fiscal

4.1.6Demand-Side Policies in 2007-08

4.1.7Strengths & Weaknesses of Demand Side

4.1.8Supply-Side Policies

4.1.9Supply-Side Policies 2

4.1.10Conflicts Between Objectives

4.1.11A-A* (AO3/4) - Conflicting Incentives

4.1.12Phillips Curve

4.1.13End of Topic Topic - Policies & Objectives

4.1.14Application Questions - UK Policies

5Business Behaviour

5.1Business Growth

5.1.1Size & Types of Firms

5.1.2Business Growth

5.1.3Pros & Cons of External Expansion

5.1.4Demergers

5.1.5End of Topic Test - Business Growth

5.1.6A-A* (AO3/4) - Business Growth

5.2Business Objectives

5.2.1Business Objectives

5.2.2End of Topic Test - Business Objectives

5.2.3Application Questions - Business Objectives

5.3Revenues, Costs & Profits

5.3.1Revenue

5.3.2Costs

5.3.3Economies & Diseconomies of Scale

5.3.4Profits

5.3.5Profits 2

5.3.6End of Topic Test - Revenue, Costs & Profits

5.3.7A-A* (AO3/4) - Revenue, Costs & Profit

6Market Structures

6.1Market Structures

6.1.1Efficiency

6.1.2Perfect Competition

6.1.3Perfect Competition 2

6.1.4Monopolistic Competition

6.1.5Oligopolies

6.1.6The Prisoner's Dilemma

6.1.7Collusion in Oligopolistic Markets

6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?

6.1.9Monopolies

6.1.10Price Discrimination

6.1.11Monopsony

6.1.12A-A* (AO3/4) - Models in Economics

6.1.13Contestability

6.1.14Benefits of Contestability

6.1.15End of Topic Test - Market Structures

6.1.16Application Questions - Market Structures

6.1.17A-A* (AO3/4) - Cereal Collusion

6.2Labour Market

6.2.1Demand for Labour

6.2.2Supply of Labour

6.2.3Labour Market Imperfections

6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment

6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?

6.2.6Wage Determination

6.2.7Elasticity of Labour Supply & Demand

6.2.8Intervention in Setting Wages

6.2.9End of Topic Test - Labour Market

6.2.10A-A* (AO3/4) - Labour Markets

6.3Government Intervention

6.3.1Reasons for Government Intervention

6.3.2Government Promotion of Competition

6.3.3Usefulness of Competition Policy & Examples

6.3.4A-A* (AO3/4) - Modern Competition Policy

6.3.5Privatisation

6.3.6Government Regulation

6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation

6.3.8Government Protection of Suppliers and Employees

6.3.9Impact of Government Intervention

6.3.10End of Topic Test - Government Intervention

6.3.11Application Questions - Government Intervention

7A Global Perspective

8Finance & Inequality

8.1Poverty & Inequality

8.1.1Absolute & Relative Poverty

8.1.2Inequality

8.1.3Inequality 2

8.1.4Lorenz Curve

8.1.5Government Policy on Poverty

8.1.6End of Topic Test - Poverty & Inequality

8.1.7A-A* (AO3/4) - Inequality & Poverty

8.2Emerging & Developing Economies

8.2.1Measures of Development

8.2.2Factors Influencing Growth & Development

8.2.3Barriers to Development

8.2.4Barriers to Development 2

8.2.5A-A* (AO3/4) - The Bottom Billion

8.2.6Development Strategies

8.2.7Interventionist Strategies

8.2.8Aid

8.2.9International Institutions

8.2.10International Institutions 2

8.2.11End of Topic Test - Emerging & Developing

8.2.12Application Questions - Developing Countries

8.3The Financial Sector

8.3.1Role of Financial Markets

8.3.2Market Failure in the Financial Sector

8.3.3Role of Central Banks

8.3.4End of Topic Test - The Financial Sector

8.3.5A-A* (AO3/4) - Financial Sector

8.4Role of the State in the Macroeconomy

8.4.1Public Expenditure

8.4.2Taxation

8.4.3Public Sector Finances

8.4.4End of Topic Test - Role of the State

8.4.5Application Questions - Role of the State

9Examples of Global Policy

9.1International Policies

9.1.1Global Debt & Deficit Policies

9.1.2Poverty & Inequality Policies

9.1.3Changes in Interest Rates

9.1.4Competitiveness Policies

9.1.5End of Topic Test - International Policies

9.1.6A-A* (AO3/4) - International Policies

9.2Policy Responses to Shocks

9.2.1International Tax Policies

9.2.2Problems for Policymakers

9.2.3End of Topic Test - Policy Responses

9.2.4Application Questions - Policy Responses

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