Efficiency | A-Level Economics Notes

These revision notes cover everything you need to know about Efficiency for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.

What is productive efficiency?

1. productive efficiency is achieved at the quantity where MC=AC
2. this is when firms minimise their average costs
3. in the long-run, this means that firms are able to fully exploit their economies of scale
4. in a competitive market, firms can pass down lower prices to consumers.
5. in a non-competitive market, firms could use their economies of scale to increase their market share, and then increase profits and re-investment

What is allocative efficiency?

1. allocative efficiency is achieved at the quantity where MC=AR
2. this is good for consumers because they benefit from an increase in output and a decrease in price
3. this means that consumer surplus is maximised.
4. consumer surplus is the difference between the price consumers pay and the maximum price they would be willing to pay
5. for example, Apple are not allocatively efficient as they set high prices.

What is dynamic efficiency?

1. dynamic efficiency is achieved when firms make supernormal profit in the long-run
2. this allows firms to increase investment
3. this allows consumers to benefit from innovations and increases in quality.
4. examples include Mr Beast re-investing his profits to improve future videos, or Apple re-investing their profits to enable them to innovate their products.

What is X-inefficiency?

1. X-inefficiency is where firms find themselves with average costs that are higher than they could be.
2. This is usually caused by a lack of incentives to minimise their costs.
3. One example of this is that a monopoly may be happy despite higher costs as they are making supernormal profits regardless.
4. Another example of this is a nationalised firm may not have the incentives to reduce costs as they are not motivated by profit and because the government may have other more important projects to focus on.

Summary questions

1. What is productive efficiency?
2. What is allocative efficiency?
3. What is dynamic efficiency?
4. What is X-inefficiency?

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