Dynamic Efficiency

Statement

Dynamic efficiency is achieved when resources are used efficiently over time — through investment in research and development, innovation and new technology that lowers costs of production or improves products in the long run.

Notes

Where productive and allocative efficiency are static — judged at a single point in time — dynamic efficiency is intertemporal: it concerns whether a firm reinvests to push its costs down and its products forward in future periods. Supernormal profit is double-edged here: it funds the research and development that drives dynamic efficiency, even where it signals a departure from static allocative efficiency. This tension is one of the standard evaluative points when comparing market structures.