Overview
This lecture covers the concept of economic efficiency in business, focusing on four main types: allocative, productive, X efficiency, and dynamic efficiency, and distinguishes between static and dynamic efficiency.
Economic Problem & Business Role
- Economics studies allocation of scarce resources to meet unlimited wants, requiring choices about production and distribution.
- In a market economy, businesses decide what and how to produce, addressing key economic questions.
Types of Economic Efficiency
- Four key efficiencies: allocative, productive, X efficiency, and dynamic efficiency make up economic efficiency.
Allocative Efficiency
- Achieved where resources match consumer demand and society's surplus is maximized.
- Occurs where demand equals supply, or where marginal social benefit (MSB) equals marginal social cost (MSC).
- On a business diagram, occurs where price (average revenue/AR) equals marginal cost (MC).
Productive Efficiency
- Happens when a firm operates at the lowest point of its average cost (AC) curve.
- Indicates full exploitation of economies of scale and minimum possible cost.
X Efficiency
- Occurs when a business minimizes waste and eliminates excess costs, producing on the AC curve.
- X inefficiency is the extra cost from not operating on the AC curve.
- Common in monopolies (due to lack of competition) and public sector firms (due to lack of profit motive).
Dynamic Efficiency
- Involves reinvesting long-run supernormal profits into capital, technology, and innovation.
- Requires sustained supernormal profit to fund research and development, upgrades, and expansion.
Static vs Dynamic Efficiency
- Static efficiency includes allocative, productive, and X efficiency—occurring at a single production point.
- Dynamic efficiency occurs over time, involving continuous improvement and innovation.
Key Terms & Definitions
- Allocative Efficiency — Resources are used where consumer demand is highest; price equals marginal cost.
- Productive Efficiency — Production at the lowest average cost; full economies of scale.
- X Efficiency — Minimizing waste and excess costs by operating on the average cost curve.
- Dynamic Efficiency — Ongoing reinvestment of profits into innovation and improvements.
- Static Efficiency — Efficiencies occurring at a single time (allocative, productive, X).
- Dynamic Efficiency — Efficiency measured over time through innovation.
Action Items / Next Steps
- Watch the next video for detailed implications of these efficiencies for consumers and producers.
- Review previous videos on allocative efficiency for deeper understanding.