Allocative efficiency shows whether or not resources are being allocated at a point where consumer satisfaction is maximised. Therefore, the point at which this occurs is where demand (also equal to AR) is equal to supply (also equal to MC). At this point there are no surpluses of demand or supply, meaning that resources are being allocated most efficiently.
Productive efficiency occurs at the point where economies of scale are fully exploited (the minimum efficient scale). Therefore the point at which this occurs is at the minimum point of a firm’s average cost curve. Not only does this enable the firm to be more competitive, but it may also be of benefit to the consumer. This is because the firm may pass on some of the cost savings to the consumers in the form of lower prices. Productive efficiency can be seen at point A on the diagram below:
Dynamic efficeicny can be attained by any firm that achieves supernormal profits. The supernormal profits that the firm achieves can then be re-invested back into the firm overtime in order to increase efficiency and lower costs, thus achieving dynamic efficiency. Firms that don’t re-invest their supernormal profits cannot be dynamically efficient. Therefore, just because a firm achieves supernormal profits in the short term, it does not guarantee that they will become dynamically efficient in the long run, it only gives them the opportunity to be so.
X-inefficiency is caused by firms being wasteful, resulting in their average costs being higher than they could be. A firm can be deemed x-inefficient if they are operating at a point which is not on the average cost curve. This can be shown on the following diagram.
At point B the firm is X-Inefficient as their average costs are higher than they could be at the quantity level they’re producing at. This inefficiency can be due to several reasons. For example, if a firm is operating within a monopoly then it will not face very much competition and therefore will not have to lower prices in order to gain customers. As a result of this, they are able to be inefficient without other firms forcing them out of the market through lower prices. This type of inefficiency can also be seen in the public sector due to the lack of profit motive, meaning that public sector organisations have no motive to lower average costs.
In contrast to this, X-Efficiency is shown on the diagram above at point A. At this level of output, the firm is unable to lower average costs further as it is already producing at a point on the average cost curve.