What is the difference between static and dynamic efficiency?

Static efficiency describes the level of efficiency at a certain point in time. This, therefore, describes both allocative and productive efficiency. A firm is productively efficient if they are at their minimum cost and so on a diagram this would be seen as producing a level of output that puts them at the lowest point of their average cost curve. Allocative efficiency describes when the allocation of resources reflects consumers wants and needs, it is seen on a diagram at the point where the price of the good equals the marginal cost. This means that the price consumers pay reflects what it would cost the supplier to produce one more unit of that good. Dynamic efficiency differs from this as it is achieved if consumers wants and needs are met as time goes on, meaning that they are allocatively efficient over time. This can be achieved through investment into production methods and innovation. If a firm is operating at a point where they're making supernormal profit, for example a monopoly, where the price they receive for their goods is higher than their average cost of production, they have the potential to be dynamically efficient. This is because this profit can be invested into research and development and innovation.

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