Edexcel A Level Economics A:复习笔记3.4.1 Efficiency

Types of Efficiency

An Explanation of the Four Types of Efficiency

Allocative Efficiency
  • Occurs at the level of output where average revenue = marginal cost (AR = MC)
  • At this point, resources are allocated in such a way that consumers & producers get the maximum possible benefit
  • No one can be made better off without making someone else worse off
  • There is no excess demand or supply
Productive Efficiency  

  • Occurs at the level of output where marginal cost = average cost (MC=AC)
  • At this point average costs are minimised
  • There is no wastage of scarce resources & a high level of factor productivity
Dynamic Efficiency  

  • Long-term efficiency is a result of innovation as a firm reinvests its profits
  • It results in improvements to manufacturing methods
    • This lowers both the short-run & long-run average total costs
  • Occurs when a firm lacks the incentive to control production costs
  • The ATC is higher than it should be
  • It often occurs due to a lack of competition in industry or in a firm that has no consequences for making a loss (e.g. some government owned companies)

Efficiency & inefficiency in Different Market Structures

  • Market structures are the characteristics of the market in which a firm or industry operates
    • These characteristics typically include
      • The number of buyers
      • The number & size of firms
      • The type of product in the market (homogenous or differentiated)
      • The types of barriers to entry and exit
      • The degree of competition
  • Market structures can be separated into perfect competition & imperfect competition
  • Imperfect competition includes the following market structures
    • Monopolistic
    • Oligopoly
    • Monopoly

Efficiency & Inefficiency in Perfect/Imperfect Competition


A perfectly competitive market on the top which experiences allocative & productive efficiency. An imperfect market on the bottom in which inefficiencies exist at the profit maximisation level of output

Perfectly competitive market diagram observations

  • The firm produces at the profit maximisation level of output where MC=MR (Y)
  • The firm is productively efficient as MC=AC at this level of output
  • The firm is allocatively efficient as AR (P)=MC
  • The firm is unlikely to experience dynamic efficiency as it is unlikely to have supernormal profits to reinvest

Imperfectly competitive market diagram observations

  • The firm produces at the profit maximisation level of output where MC=MR (A)
  • The firm is not productively efficient as AC > MC at this level of output (B-A)
    • Productive efficiency would occur at point E where MC=AC
  • The firm is not allocatively efficient as AR (P) > MC at this level of output (D-A)
    • Allocative efficiency would occur where AR=MC
  • The firm is likely to experience dynamic efficiency as it will be able to reinvest its profits so as to increase innovation