This lesson explains why long-run perfect competition is associated with two different kinds of efficiency: productive efficiency and allocative efficiency. These concepts help us assess how resources are used and whether the amount produced reflects the value consumers place on goods.
Productive efficiency means producing goods and services without waste. In a production possibility frontier model, it means production is on the frontier rather than inside it. For an individual firm, the relevant idea is producing at the lowest possible average cost.
All flashcards
What is productive efficiency?
Producing without waste; in long-run perfect competition, firms produce at the minimum of long-run average cost.
What is allocative efficiency?
Choosing an output where the social benefit of the marginal unit matches its social cost; in the competitive model, P=MC.
How do entry and exit affect long-run competitive markets?
Entry in response to economic profit and exit in response to economic losses adjust supply, helping move price toward minimum long-run average cost.
Why does efficiency not guarantee fairness?
Willingness to pay reflects ability to pay as well as preferences, so an efficient outcome can still involve unequal access.
Why is perfect competition used as a benchmark?
It provides an idealized comparison point for assessing real markets, whose assumptions may not hold.
Quiz questions
Why can an efficient market outcome still raise concerns about fairness?Answer: Willingness to pay reflects both preferences and ability to pay.
What is the main use of perfect competition as a hypothetical benchmark?Answer: It provides a standard for comparing actual market outcomes.
How can pollution weaken the conclusion that a competitive market achieves allocative efficiency?Answer: The market price may omit pollution costs imposed on others.
If corn and wheat prices converge, why might farmers shift land toward corn when corn yields more bushels per acre?Answer: The narrowed price advantage of wheat can make corn more attractive to grow.
Why might firms with market power fail to achieve allocative efficiency?Answer: They may set price above marginal cost rather than producing where the two are equal.
Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.