Edexcel A Level Economics A:复习笔记3.4.1 Efficiency

An Explanation of the Four Types of Efficiency

• 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