Dynamic efficiency, which consists of the firms ability to utilise the technological innovations of the time and adapt their products and services to changes in the consumers taste. It is concerned with investing in technological innovations that may assist in improving production to its optimal rate. This includes improved machinery, or an increase in management of human capital which may involve high costs in the short run but will ultimately but can be seen as an investment to decrease the long run average cost curves.
Productive efficiency is concerned with the production of goods or services using the least amount of resources to attain a maximum level of output at the lowest possible cost. Therefore a firm is said to be productively efficient when it operates at the lowest point of the average cost curve.
Allocative efficiency occurs when the consumer’s preferences is taken into account to reach an optimal level of distribution of goods and services. This may mean making slight changes to the products or services that they offer to cater for what the market wants at that point in time.
The efficiency of an economy can be simplified using the production possibilities curve where the trade offs between two goods or services produced in an economy are compared in order to...