Perfect competition market structures are rarely in reality, but very important to examine in theory, since their characteristics are found with no any other market structure. For instance, perfect competition markets attain a level of efficiency which is not exhibited in less competitive markets such as monopoly, monopolistic competition, and oligopoly (Glader, 2014). A perfectly competitive market is a market structure in which there are many firms, freedom of entry and exit, homogenous products and perfect information.
Economic efficiency is defined into; productive efficiency –in which firms are required to produce at the lowest average total cost possible, and allocative efficiency which is concerned with the quantity of output produced in a market.
GRAPH 1: Economic Efficiency in Perfect Competition.
When the industry is in long-run equilibrium, it gives allocative efficiency at P=MC, while P=MC, where AC is minimized, gives productive efficiency.
The industry’s structure gives a static efficiency as a result of price seeking behavior which eliminates costs by reducing inefficient firms.
Productive Efficiency
The market experiences productive efficiency in the case where equilibrium output in the market is supplied at the minimum average cost.
Perfect competitive markets attain productive efficiency in the long-run.
The firms which have huge unit costs might not be capable of justifying their survival within the industry as forces of competition drive down the prices in the market.
Allocative Efficiency
Allocative efficiency is achieved in both the long-run and short-run in which the price equals to marginal cost (P=MC) (Lipsey & Harbury, 2011).
At the equilibrium price, both the producer and consumer surplus are maximized.
Allocative efficiency ensures that an agent cannot be made better off without making the other agent at least worse off. For instance, it achieves a Pareto optimum resource allocation.
References
Glader, M. (2014). Innovation markets and competition analysis: EU competition law and US antitrust law. Cheltenham, UK: Edward Elgar.
Lipsey, R. G., & Harbury, C. D. (2011). First principles of economics. Oxford: Oxford University Press.
