Efficiency (Edexcel A Level Economics A)

Types of Efficiency

An Explanation of the Four Types of Efficiency

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 and 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 and imperfect competition

• Imperfect competition includes the following market structures

  • Monopolistic

  • Oligopoly

  • Monopoly

Efficiency and inefficiency in perfect/imperfect competition

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