The paper "How Perfect Competition Leads to Allocative Productive and Dynamic Efficiency" is a wonderful example of an assignment on macro and microeconomics. Explain with the use of diagrams where appropriate how perfect competition leads to allocative productive and dynamic efficiency Perfect competition This is a market structure that is assumed too strong and cannot exist in the real world market situations. The market is characterized by the following main features (Besanko & Braeutigam, 2010); Presence of many buyers and many sellers Ease of entry and exit into the market as the costs are minimal Homogeneity of the products on sale and as such the products are perfect substitutes making seller be price takers Perfect knowledge of the market by both sellers and buyers Factors of production are mobile With these assumptions, perfect competition can be viewed as a market structure that can be used to achieve efficiency in the market through in the following ways.
The figure below shows a point where P=MC where allocative efficiency is achieved. Allocative efficiency This is achieved both in the short run and long-run period where the price is equal to marginal cost (P=MC). This ensures that allocative efficiency is achieved since both the consumers’ and the producers’ surplus is maximized at the point where marginal cost equals the price.
This is achieved because the individual firm is a price taker in a large market and thus cannot influence the price. In a flat demand curve, the firm will have one price. The firm will therefore produce until it has achieved volumes that will cover marginal costs at the point where the marginal cost is equal to marginal revenue. This means the consumer and the producer each benefit from efficient allocation of resources or what can be referred to as Pareto optimum allocation of resources, where the firm produces the right amount, to the right people, at the right time and at the right price for both players in the market (Fried, Lovell, & Schmidt, 2008).
Besanko, D., & Braeutigam, R. (2010). Microeconomis (4 ed.). John Wiley and Sons.
Fried, H., Lovell, K., & Schmidt, S. (2008). The Measurement of Productive Efficiency and Productivity Growth. Oxford University Press.
Mckenzie, M. (2006). Microeconomic reform and productivity in Australia – boom or blip. Working Paper- Deakin University Australia .
McKenzie, R. (2008). In Defense of Monopoly: How Market Power Fosters Creative Production. University of Michigan Press.
Solow, R. M. (1998). Monopolistic Competition and Macroeconomic Theory. Cambridge University Press.
Wessels, W. (2006). Economics. Barron's Educational Series.