Explain how a perfectly competitive market causes allocative efficiency to occur. What is the mathematical requirement...
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Explain how a perfectly competitive market causes allocative efficiency to occur. What is the mathematical requirement for allocative efficiency? Why is this requirement met in perfect competition and in no other market structure?
Homework Answers
Allocative efficiency occurs when it is nearly impossible to obtain any net gains for society with alteration the combination of products and services which are produced from limited supply of resources in society. Mathematically the allocative efficiency is situation when in all parts of the economy the price equals marginal cost. Thus at the ruling price, producer as well as consumer surplus are maximised. Under perfect competition after all long-run adjustments are completed output will occur at each firm’s minimum average total cost thus a point where the price of product is equal to marginal revenue; and hence the allocative efficiency occurs. Allocative efficiency occurs in perfect competition because it is the only market structure wherein the firms will produce at a price where there is no economic profit
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(a) Why are firms operating under perfectly competitive market said to be a ‘price taker’? What...
(a) Why are firms operating under perfectly competitive market said to be a ‘price taker’? What impact does this have on the firm demand curve? (4 marks) (b) “Firm operating under perfect competition can only earn zero economic profit in the long run" Discuss this statement (6 marks)
Discuss the four characteristics of perfect competition demand curve of a perfectly competitive firm is horizontal?...
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3) In this class we have discussed two types of efficiency: allocative efficiency and productive efficiency. This question is intended to explore those concepts more deeply. Assume the market for milk is a perfectly competitive market. Briefly explain the meaning of allocative efficiency in this market. a. b. Briefly explain the meaning of productive efficiency in this market. Is there any other important gain or cost to society caused by the dairy market that is not C. included in our...
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