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Table of Contents

  1. Topic pack - Microeconomics - introduction
  2. 1.1 Competitive Markets: Demand and Supply
  3. 1.1 Competitive Markets: Demand and Supply - notes
  4. 1.1 Competitive markets - questions
  5. 1.1 Competitive markets - simulations and activities
  6. 1.2 Elasticities
  7. 1.2 Elasticities - notes
  8. Section 1.2 Elasticities - questions
  9. Section 1.2 Elasticities - simulations and activities
  10. 1.3 Government intervention
  11. 1.3 Government Intervention - notes
  12. 1.3 Government intervention - questions
  13. 1.3 Government intervention - simulations and activities
  14. 1.4 Market failure
  15. 1.4 Market failure - notes
  16. Section 1.4 Market failure - questions
  17. Section 1.4 Market failure - simulations and activities
  18. 1.5 Theory of the firm
  19. 1.5 Theory of the firm - notes (HL only)
    1. Cost theory
    2. Calculating costs
    3. Short-run
    4. Long-run
    5. Internal economies of scale
    6. External economies of scale
    7. Diseconomies of scale
    8. Long run cost curves
    9. The very long run
    10. Revenues
    11. Revenues - notes
    12. Profit
    13. Profit - notes
    14. Combining revenue and cost curves
    15. Profit maximisation - price taker
    16. Profit maximisation - price setter
    17. Alternative aims of firms
    18. Profit, sales and revenue maximisation
    19. Perfect competition
    20. Perfect competition - notes
    21. Short-run to long-run - profits
    22. Short-run to long-run - losses
    23. Shut down price, break-even price
    24. Efficient allocation of resources
    25. Monopoly and oligopoly
    26. Monopoly and oligopoly - introduction
    27. Growth and power
    28. The model of monopoly
    29. Monopoly - profit maximisation
    30. Monopoly equilibrium
    31. Monopoly v. perfect competition
    32. Economic efficiency in perfect competition
    33. Economic efficiency in perfect competition and monopoly
    34. Efficiency and market structure
    35. Monopolistic competition
    36. Monopolistic competition - notes
    37. Monopolistic competition in the short-run
    38. Monopolistic competition in the long run
    39. Oligopoly
    40. Oligopoly - notes
    41. Advertising and branding
    42. Product innovation
    43. Theories of oligopoly - non-collusive
    44. The kinked demand curve theory
    45. Kinked demand curve - change in cost
    46. Cut-price competition (predatory pricing)
    47. Theories of oligopoly - collusive
    48. Forms of collusion
    49. Price discrimination
    50. Equilibrium of the discriminating monopolist
  20. Section 1.5 Theory of the firm - questions
  21. Section 1.5 Theory of the firm - simulations and activities
  22. Print View

Efficient allocation of resources

Economists are concerned about the efficiency of markets, and ensuring that resources are allocated efficiently.

Perfect competition is considered to be efficient because:

  • Supernormal profits are not made by any firm in perfect competition in the long-run.
  • MC = price, so both parties, suppliers and customers, get exactly what they want.
  • No wasteful advertising.
  • Firms are allocatively and productively efficient.

The major assumption behind this analysis and evaluation is that firms cannot produce products cheaper if they were bigger. It assumes that there are no economies of scale available in the market.


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Allocative efficiency

Allocative efficiency occurs when the value consumers put on the good or service equals the cost of producing the product or service. In other words, when price = marginal cost.

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Productive efficiency

Productive efficiency occurs when output is achieved at the minimum average cost.


We can see from Figure 1 below that when it is in long-run equilibrium, perfect competition achieves allocative and productive efficiency as MC = MR = AC = AR. This means that they are maximising profits (MC = MR) but only making normal profit (AC = AR).

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Figure 1 Long-run equilibrium - perfect competition

So, perfect competition looks good, but is it always so? Problems with perfect competition are:

  • There are no reasons to do anything better, or research new products. As soon as you do, everybody else would step in and copy. Wait and let somebody else do it.
  • Consumer has no choice. There is just one unbranded product on the market.
  • Some economies of scale always exist.
  • Perfect competition is not competitive in the fullest sense of the word!
  • Barriers to entry will always exist. Even street traders will usually be required to apply for and, usually, buy a trading licence.

Look at economies of scale. Some are always likely to exist. Financial economies apply - the better your reputation the cheaper the loans, bulk-buying economies are there as well. Economies of scale are there, like gravity. It is up to the firm to take advantage of them. Competition encourages their application and exploitation.

Perfect competition may well operate efficiently, as far as economists are concerned. The consumer, however, may get an ordinary product or service at a high price. Is it worth it?

question

1
Productive efficiency

At what point will the firm be productively efficient?

a)
b)
c)
d)
Please select an answerNo, that's not right. This is the condition for profit maximisation.No, that's not right. This would mean that the firm is making normal profit.Yes, that's correct. If MC=AC then the firm is producing at the minimum point of the average cost curve and is therefore productively efficient.No, that's not right. This would mean that the firm is allocatively efficient.
Check your answer

2
Allocative efficiency

At what point will the firm be allocatively efficient?

a)
b)
c)
d)
Please select an answerNo, that's not right. This is the condition for profit maximisation.No, that's not right. This would mean that the firm is making normal profit. No, that's not right. If MC=AC then the firm is producing at the minimum point of the average cost curve and is therefore productively efficient. Yes, that's correct. This would mean that the firm is allocatively efficient.
Check your answer