Allocative-Efficiency+in+Perfect+Competition

Allocative Efficiency in Perfect Competition We have seen that allocative efficiency is an industry's single point where a product is being made at exactly the right price and exactly the right quantity. This product, therefore fulfills societal needs. In terms of a perfectly competitive industry, this point of allocative efficiency occurs where price, which is also equal to marginal revenue, is equal to marginal cost. Conceptually, this is the ONLY point where allocative efficiency is maintained. Thus, essentially there is only one true spot where society can be happy.

Let's look at this idea conceptually. If an industry were to produce a lesser quantity than that where P=MC, MR would exceed MC and thus the industry is failing to provide necessary units of output to the public. Also, the industry itself is losing for it is missing out on all of the profit that is above MC and below MR. If an industry produces at a point where MR has not yet crossed MC, resources are not being used efficiently to produce the correct output, and are therefore underallocated. On the contrary, however, it is not in society's or the industry's favor to produce at a point where MR is less than MC. At this point, an industry is overallocating its resources and producing more output than society actually calls for. Not only that, the industry it self is, because P is less than MC, losing money. Thus, in effect, the point of allocative efficiency is where P(MR)=MC.

Graphically..... Only at the point where Price is equal to Marginal Cost will this industry be allocatively efficient. Producing at a lower quantity (underallocative) will not provide society with every necessary unit. Producing at a higher quantity (overallocation) will provide society with too many units. Also, in this graph the point of allocative efficiency is the same as the point of productive efficiency. In perfect competition this will always be the case in the long run (P=MC=ATC) however in the short run it is not always the case.

media type="youtube" key="k8l--J5iJ8w" height="344" width="425" Jump to 1 minute 30 seconds for the relevant information. Like he says at MR=MC the industry maximizes profits (is allocatively efficient)

Additional Links [|First Book of Economics] [|Perfect Competition] [|Economic Efficiency] Sample problem In a perfectly competitive industry which is not the equivalent of allocative efficiency? a. P=MC b.P=ATC c.MR=MC d.AR=MC

correct answer: b. P=MR=AR thus a c and d must be correct. Also, P=ATC is not allocative efficiency but rather productive efficiency.