Cambridge International as and a level Economics Ebook

Dynamic eff iciency
Dynamic effi
ciency
is a form of productive effi
ciency that 
benefi ts a fi rm over time. Resources are reallocated in 
such a way that output increases relative to the increase in 
resources. It is achieved when a fi rm meets the changing 
needs of its market by introducing new production 
processes in response to competitive pressures. It can be 
particularly relevant when analysing how monopolies and 
oligopolies seek to remain competitive (see 
Chapter 7
). By 
using their excess profi ts, such fi rms are able to engage in 
research, development and product innovation in order to 
protect their market share. In turn, this can bring benefi ts 
to consumers in the form of new technologies and lower 
prices while giving the fi rm a more effi
cient means of 
production.
Dynamic effi
ciency is a longer-term phenomenon. To 
achieve it requires investment sourced from within or 
outside of the fi rm. Initially, it can result in higher costs; 
the payback comes later yet without investing, a fi rm may 
be destined to become less effi
cient and may be forced to 
leave the market. Where a fi rm is dynamically effi
cient, 
its long-run average cost curve shift s downwards (see 
Chapter 7
). Th
is is shown in
 Figure 6.4
. 
Robots in a car manufacturing plant
Figure 6.4 
Dynamic eff iciency
Costs
Output
Non-Inflationary Economic Growth
0
LRAC
1
LRAC
2
q
1
q
2
C
1
C
2
133
Chapter 6: Basic economic ideas and resource allocation

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A typical example is that of the motor vehicle 
manufacturing industry. Th
is is a fi ercely competitive 
industry that has experienced both growth and 
rationalisation as fi rms have had to become more effi
cient 
to survive. Th
e industry has come a long way since Henry 
Ford made his factories the most effi
cient in the USA in 
the 1920s and 1930s. Innovation and extensive investment 
have resulted in highly effi
cient, automated production 
plants. Computer-aided techniques and robots rather than 
workers have contributed to increased effi
ciency and lower 
production costs per vehicle.