Question

Economists point to perfectly competitive markets as the “gold standard” of market structures, by which all other market structures that we will soon learn about (i.e., monopoly, monopolistic competition, and oligopoly) fall short in delivering low prices and output for consumers and society more broadly. Describe why firms in a perfectly competitive market are both productive efficient and allocative efficient, defining what is meant by both terms as well as the conditions that lead to these in long-run equilibrium

Answer 1

Perfectly competitive markets are rare in the reality. Perfectly competitive markets acquire an efficiency which cannot be aquired in less competitive markets like Oligopoly, Monopolistic competition and Monopoly.Efficiency in the perfectly cpompetitive market may be allocative efficiency or productive efficiency. Allocative efficiency means the quantity of output that is produced in the market and productive efficiency means that firms will produce their goods  at the lowest average total cost .Both types of efficiency are there in the perfectly competitive market in the long run.Producing without waste is productive efficiency ie goods are produced and sold at the lowest possible average cost.Allocative efficiency in a perfectly competitive market means price will be equal to the marginal cost of production ie P=MC.At a greater quantity produced , marginal cost of production will increase so that P<MC.At a lesser quantity produced marginal cost will not increase and soP>MC.So perfectly competitive firms will maximise their profits when P=MC.A pointed earlier perfectly competitive firms are hypothetical and other market structures will not achieve productive and allocative efficiency.