Question

Describe two reasons why perfectly competitive markets maximize economic efficiency.

Rubric:

The conclusion/opinion is supporting using specific examples from economic theory, empirical evidence or policy issues and are clearly connected to the question

Includes correct facts and definitions concerning economic theory, evidence or policy issues.

Answer 1

Perfect competition is an idealized structure of the market that achieves effective resource distribution. This effectiveness is accomplished as the profit-maximizing amount of production generated by a perfectly competitive company outcomes in price-marginal cost equality. In the brief term, this includes price equality and marginal short-run cost equality. In the long run, this is seen at the minimum efficient scale of manufacturing with the equality between price and long-run marginal cost.

Effective resource allocation is achieved if the overall level of satisfaction of society can not be increased by generating more than one good and less of another good. A company achieves such efficiency when a good's price is equal to the marginal cost of production. Price: The price customers are prepared to pay for a good shows the fulfillment produced by the good being produced and consumed. If a good is more satisfied then society is prepared to pay a greater cost.

Marginal Cost: The marginal cost of manufacturing shows the satisfaction foregone from other products manufacturing. If the output is more satisfied, then the marginal cost

Productive efficiency implies waste-free manufacturing so that the decision is on the frontier of manufacturing option. In the long run, the price on the market is equivalent to the minimum of the long-run average cost curve in a perfectly competitive market due to the process of entry and exit. In other words, at the smallest possible average price, products are manufactured and sold.
When fully competitive companies follow the rule of maximizing earnings by generating at a amount where price is equal to marginal expense, they ensure that the social advantages obtained from generating a good are in line with the social cost of manufacturing.

When perfectly competitive firms maximize their profits by producing the quantity in which P= MC,ensures that the benefits to consumers of what they purchase — as measured by the price they are willing to pay — are equal to the costs to society of producing the marginal units— as measured by the marginal costs that the firm has to pay. Therefore, it maintains allocative efficiency.