100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
logo-home
Previously searched by you
Previously searched by you
logo
Essay Unit 3 - Perfect Competition £4.94   Add to cart
Quickly navigate to
Preview
  2.  
  3. PEARSON (PEARSON)
  4.  
  5. Economics 2008
  6.  
  7. Unit 3 - Business Economics and Economic Efficiency

Essay

Essay Unit 3 - Perfect Competition
 7 views  0 purchase

This essay includes points using chains of analysis and evaluation to examine the extent to which a perfectly competitive firm is allocatively efficient, productively efficient and x efficient.

Preview 1 out of 2  pages

Document information

  • January 23, 2022
  • 2
  • 2021/2022
  • Essay
  • Unknown
  • A+

Subjects

Written for

All documents for this subject (14)

Seller

avatar-seller
thea905

Content preview

To what extent is the perfectly competitive market structure efficient?


Perfect competition is a market structure in which there are many buyers and
sellers, there is freedom of entry and exit in the market, all firms produce
homogenous products and there is perfect knowledge.


In a perfectly
competitive market,
firms are allocatively
efficient. Allocative
efficiency occurs when
there is optimal
distribution of goods or
services in market,
according to consumer
preferences in order to
maximise welfare. In the diagram above, for an individual firm, allocative
efficiency occurs when Marginal Cost = Average Revenue = Price (MC=AR=P). In
the market diagram, it is shown that there is no deadweight welfare loss, as
consumer surplus and producer surplus are both maximized. To understand, in
the short-run, firms are able to make supernormal profits as average revenue
is greater than average cost. This then signals new firms to enter the market, in
order to attain some of the supernormal profit that is being made. This causes
an increase in supply, thus shifting the supply curve outwards. In turn, this
would cause a fall in price. Hence, in the long run, a price taking firm will
continue to produce at AR=MR=D and where AR=MC thus earning normal
profit. Therefore, achieving allocative efficiency. However, the assumption that
firm are purely price takers is unlikely. In reality, majority of firms have price
setting power to a certain extent. This is because firms tend to compete with
one another, thus resulting in changes in price. So, it would be difficult to
argue that in the long-run, firms would be price takers thus achieving allocative
efficiency.
In a perfectly competitive market, firms are also productively efficient.
Productive efficiency occurs when the production of goods and services is
maximised at the lowest possible average cost. It occurs during the complete
exploitation of economies of scale. In the diagram above, depicting a firm cost
curves, productive efficiency is achieved when the MC curve intersects the AC
curve at its lowest point. This point is where the greatest quantity of output is
produced at the lowest unit cost of production. Productive efficiency could

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

Quick and easy check-out

You can quickly pay through credit card for the summaries. There is no membership needed.

Focus on what matters

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller thea905. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for £4.94. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

67474 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now

Start selling
£4.94
  • (0)
  Add to cart