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Confused on dynamic efficiency.. watch

    • Thread Starter

    Is dynamic efficiency when productive efficiency increases? Or is when profit can go towards innovation etc. OR is it both??
    And if it's when productive efficiency increases over time, then how is dynamic efficiency an advantage of monopolies since they aren't productively efficient anyway?

    Dynamic efficiency is when firms (which are producing at super-normal profit [also known as abnormal profit]) reinvest to improve productivity in the long run through innovation in terms of production technology.

    This is an advantage of monopolies as they normally produce at large super-normal profits, unless they are trying to appear as if they're in a contestable market. With this super-normal profit they can then invest this to improve production methods and so in the long run potentially be more productively efficient.

    There is an extra incentive for firms of monopoly power to do this as they are the only producer in the market and so innovation in such market only benefits them.
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