Is this quote true? "'Perfect competition' is considered both the ideal and the default state in...

Is this quote true?

"'Perfect competition' is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand."

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Expert Solution

The quote is true.

Equilibrium in perfect competition occurs when quantity demanded equals quantity supplied. The features of perfect market is that the products are identical, information is perfect, there are numerous buyers and sellers, entry and exit from the industry is free, no transportation cost. In perfect competition, the demand curve is horizontal, perfectly elastic. Producers can sell any amount of output at the prevailing price. If price is increased, then the producers lose customers. If price is decreased, they will make a loss since they operate at minimum ATC.

Long term equilibrium of the perfectly competitive firm promotes allocative and productive efficiency. Allocative efficiency because P=MC. Price is the willingness to pay by a consumer, which is the social benefit. MC is the cost to the producer, which is the social cost of producing the good. Allocative efficiency occurs when social benefit equals social cost. Allocative efficiency means that resources are used most efficiently in an economy.

Productive efficiency occurs in perfect competition, because P=minimum ATC. This means the goods are produced at the lowest cost.

Rahul Sunny answered 1 year ago

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