Pure Competition and EfficiencyThis is a featured page

Purely competitive markets are good for society because it forces firms to achieve maximum efficiency (productive and allocative efficiency).
Productive Efficiency (P= minimum ATC)
  • Requires that goods be produced in the least costly way.
  • Firms are forced to produce at the minimum average total cost in the long run.
    • highly favorable situation from the consumer's POV because it means that minimum amount of resources will be used to produce any particular output
  • Consumers benefit from productive efficiency by pay the lowest product price possible under the prevailing technology and cost conditions
  • Firm receives only a normal profit, which is part of its economic costs and thus incorporated in its ATC curve
  • Therefore Purely Competitive firms are the most productively efficient.

Allocative Efficiency (P= MC)
  • Requires that resources be apportioned among firms and industries to yield the mix of products and services that is most wanted by society.
  • Realized when achieving a net gain for society by altering the combination of goods produced is impossible
  • Least-cost production must be used to provide society with the "right goods"--the goods that consumers want most
  • Two elements that are critical:
    • 1. The money price of any product is society's measure of the relative worth of an additional unit of that product.
    • 2. The idea of opportunity cost, we could see that the marginal cost of an additional unit of a product measures the value, or relative worth, of the other goods sacrificed to obtain it.
  • In a pure competition economy, when profit-motivated firms produce each good or service to the point where price and marginal cost are equal, society's resources are being allocated efficiently.
  • Purely competitive markets restore efficiency when disrupted by changes in the economy, e.g. consumer tastes, resource supplies, or technology.
  • highly efficient allocation of resources that a competitive economy promotes is because businesses and resource suppliers seek to further self interest
  • relates to the concept of Adam Smith's "invisible hand" in which the private interests of producers are fully in sync with society's interest in using scarce resources efficiently.
  • Purely Competitive firms at the proper MR.Darp value must in turn have an unlimited supply, meaning they have an ample amount of goods to be allocatively efficient to the consumer.

Maximum Consumer and Producer Surplus
  • A level of output at which P = MC = lowest ATC, marginal revenue = marginal cost, maximum willingness to pay = minimum acceptable price, and combined consumer and producer surplus are maximized.
    • Consumer surplus is the difference between the max prices that consumers are willing to pay for a product and the market price of that product.
    • Producer surplus is the difference between the minimum prices that producers are willing to accept for a product and the market price of the product.


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