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In: Economics

Q9. What does a competitive market mean to society in terms of productive efficiency?

Q9. What does a competitive market mean to society in terms of productive efficiency?

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Expert Solution

When profit-maximizing firms combine with utility-maximizing consumers in perfectly competitive markets, something remarkable happens — the resulting quantities of goods and services outputs demonstrate both productive and allocative efficiencies.

Productive efficiency requires waste-free production, meaning that the option is on the edge of output probability. In the long term the price on the commodity is equal to the mean of the long-run average cost curve of a reasonably balanced market — because of the cycle of entry and departure. In other words, the goods are manufactured and sold at the lowest average cost possible

If perfectly competitive firms follow the rule that earnings are maximized by selling at a amount where quality is equal to marginal costs, they insure that the social benefits obtained by manufacturing a good are in line with the social costs of production. Perfect competitiveness is a realistic criterion, in the long term. For business systems such as direct, direct pricing, and oligopoly — observed more often in the modern world than ideal competition — companies do not often sell at the overall cost level, nor do they necessarily set rates equal to production costs. Such other competitive situations will therefore not produce productive and allocative efficiencies


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