Question

For purely competitive industry, in long-run equilibrium, MR = P = minimum ATC = MC. Answer the following and distinguish between productive efficiency and allocative efficiency in your answer.

A. Of what significance for economic efficiency is the equality of P and minimum ATC?

B. What is the importance of the equality of P and MC?

Answer 1

A perfectly competitive firm is in long-run equilibrium when the following condition is satisfied:

Price = MC = Minimum ATC

A. P = Minimum ATC condition corresponds to the productive efficiency. Productive Efficiency is achieved when the output level is produced at minimum cost. This output level is known as the Minimum Efficient Scale (MES). There is no wastage of resources at this output and there are no deadweight losses.

However, allocative efficiency is achieved when P = MC or AR = MC. Here, there is no added condition that P has to be at a minimum of ATC.  

B.

The equality of P and MC corresponds to the Allocative Efficiency. Allocative Efficiency occurs when consumer preferences are taken into consideration and optimal distribution of commodities happens.

This efficiency is important as the consumer's willingness to pay for the good is just equal to the marginal utility they derive from consuming that good. Hence, all the consumers are satisfied and would not want to deviate from this price.

The Marginal Benefits measured by MU are exactly equal to the MC ie. MU = MC

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