Essay On Allocative Efficiency

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Recommended: Market structure: business economics

a.) Perfect competition is used to benchmark allocative efficiency in market structure. It can be considered as unrealistic but still, characteristics of perfect competition guarantees efficiency. To demonstrate perfection is in fact the main purpose of perfect competition, it helps to evaluate the physical world market structure that certainly fall short of this perfection and illustrate the best of all possible resource allocation worlds. With perfect competition efficiency is achieved because the price is equal to marginal cost. The value of goods produced is indicated by price and thus production generates satisfaction. Opportunity cost of unproduced goods is indicated by marginal cost and therefore resulting lost satisfaction from forgone production. Overall satisfaction cannot be added by decreasing of increasing production because the price (satisfaction obtained) is equal to marginal cost (satisfaction forgone). If there is no equality between price and marginal cost then we can increase satisfaction by changing production. Allocative Efficiency: When the quantity of output produced achieves the greatest level of total welfare possible. When MB=MC. When P=MC. B.) Monopolistically competitive firms fail to achieve allocative efficiency because price is greater than Marginal cost. One of the reasons of its inefficiency is also because it charges greater prices and produces lower output as compared to perfect competition. As can be seen from the graph all firms wishes to make maximum profit. Allocative efficiency is the best point, where Marginal cost equals to marginal revenue (Q3). All firm will like to have maximum profits where marginal cost while equals to marginal revenue (Q1). ... ... middle of paper ... ...ortionate change in demand divided by the proportionate change in income) Elastic because the value is greater than 1. Complementary good because the demand for the good decreases as the price of the other good increases. Answer 9 (a) the firm will produce 70 units in order to maximise profits at a price of $8 per unit. (b) The firms avaerage cost of production will be $6 at the output. (c) The firm will make $2*70 = $140 profit. (d) The will produce 50 units in order to maximise its profit at a price of $5 per unit. (e) It will make $0 profit. (f) The firm will produce 40 units in order to maximise profits at a price of $ 4 per unit. (g) Firm will be at loss of $1.50*40=$60. (h) The firm will shut down below the price of $ 3.50 (where P=AVC). (i) The will shut down below the price of $ 5 (where P=AC) in the long run.

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