hi everybody we know that economics is a study of how to best solve the basic economic problem how to allocate scar resources given unlimited wants that forces choices to be made what to produce how to produce for whom to produce for in a market economy businesses answer a lot of these questions they answer what to produce and how to produce they're a fundamental part of answering the basic economic problem so we need to study in economics are they efficient when we answer that question there are four efficiencies we need to look at allocative efficiency productive efficiency X efficiency and dynamic efficiency these four constitute economic efficiency and we need to know in a business sense where do all of these occur let's start with allocative efficiency we've already studied allocative efficiency make sure you've watched my previous video on it to have detailed understanding but in that video we looked at allocative efficiency in three ways we said it occur where resources follow consumer demand where Society Surplus is maximized that's a sum of consumer and producer Surplus and we said it's where net social benefit is maximized and in an economic Market we said that occurs where demand equals Supply and assuming there are no acon alties it also occurs where MSB equals MSC but in a business sense can we apply the same concept here yes we can where is demand equals Supply on a business diagram well the demand curve is the average revenue curve which is also the price the supply curve is the marginal cost curve so we can say that on a business diagram allocative efficiency occurs where average revenue or price is equal to marginal cost so where price equals marginal cost and that is where demand equals Supply if we put that on a diagram where is Price AR equal to MC well it's equal there so let's call that quantity there QA a for allocative efficiency okay now it's very important at this stage as well that you watch all the other efficiencies and then you watch the next video in this playlist where I go into lots of detail as to what that means what does it mean for consumers what does it mean for producers but at this stage let's go now and have a look at productive efficiency productive efficiency occurs when a firm is operating at the lowest point of their average cost curve so here a firm is minimizing their costs how are they doing that well they are fully exploiting all potential economies of scale to get there on a diagram it's going to be right here that point there the minimum point of that average cost let's call that quantity QP P for productive efficiency brilliant let's now look at X efficiency X efficiency occurs when a business is minimizing their waste I.E there are no excess costs and that occurs when production takes place on the average cost curve let's show that diagrammatically let's take a business and their average cost curve but this business is not large enough to to get to productive efficiency they're only producing quantity q1 but even at quantity q1 a business could minimize their waste they could minimize their costs by producing on their average cost curve and thus achieving X efficiency that occurs at Point a with cost of C1 if this business was X inefficient production would take place above their average cost curve maybe at point B with cost of C2 the difference between C2 and C1 is the x inefficiency is the excess cost is the waste that could creep in but why on Earth would a business allow for Waste to creep in why could there be X in efficiency two good examples let's take a monopolist first a monopolist lacks a competitive drive and therefore complacency could creep in X inefficiency could creep in but Monopoly are profit maximizers so even then it makes no sense even if there isn't competition it doesn't make much sense to allow for this waste to creep in think of it this way X inefficiency to reduce it is very difficult and it's quite popular it might mean reducing wages it might mean taking away staff perks there's a couple of examples well that's not desirable for people that work for the business that's not popular that's a difficult thing to do and therefore if you lack a competitive drive it might be easier just to allow it to continue but also public sector firms they are not profit motivated their objective is to maximize social welfare and therefore because of a lack of a profit drive there could be X and efficiency that Creeps in as a result waste that Creeps in as a result so there are two good examples where we might see X in efficiency let's finish off guys by looking at Dynamic efficiency Dynamic efficiency is the reinvestment of long run supern normal profit back into the business in the form of new capital upgraded Capital New Technology Innovation and R&D maybe Factory expansion you get the idea let's show that on a diagram let's say we have a business profit maximizing producing where MC equals Mr that gives us a quantity q1 the price we need to read off the AR curve that gives us P1 and now at that quantity and price we can see that average revenue which is over here is above average cost which is down here so there is super normal profit being made per unit multiply that by all units being sold we get this box of super normal profit so that's the total super normal profit being made by the business and if that can last over time if that can last in the long run this business has the potential of being dynamically efficient so the condition is that there needs to be long run super normal profit enough profit to finance this reinvestment so now we understand our four major efficiencies allocative productive X and dynamic one final concept to finish on and that is the difference between static efficiency and dynamic efficiency static efficiency consists of allocative productive and X efficiency these are all efficiencies that occur at one specific production Point hence they are static efficiencies whereas dynamic efficiency occurs over time this is a very important thing to remember something you must know and Concepts that will be using in future videos in this playlist so take that down and learn it hopefully you guys Now understand these major efficiencies that relate to businesses make sure that you watch the next video where we delve into more detail and say what they mean for consumers and producers I'll see you all in that video thank you so much for watching guys