3.4
EFFICIENCY
Efficiency - used to judge how well the market allocated resources, and relationship between scarce inputs and outputs
ALLOCATIVE EFFICIENCY
This is achieved when resources are used to produce goods and services which consumers want and value the most
highly
social welfare is maximised
this occurs when the value to society from consumption = marginal cost of production
where P = MC or AR=MC
IS ACHIEVED in perfect competition
PRODUCTIVE EFFICIENCY
Achieved when products are produced at the lowest average cost
this means fewest resources are used to produce each product
minimum resources used to produce the maximum output
Can only exist when firms produce at the bottom of the AC curve
where MC = AC
IS ACHIEVED in perfect competition in the long run
DYNAMIC EFFICIENCY
Achieved when SNP is reinvested in R&D
reduces the production costs
improves product quality over time
NOT achieved in perfect competition
firms are unable to invest in r&d due to lack of supernormal profits
X - INEFFICIENCY
When a firm fails to minimise its average costs and profits at a given level of output due to lack of competition
Not producing on the lowest part of the AC curve
Often occurs when there is a lack of competition - firms have little incentive to cut costs
NOT achieved in perfect competition
the competition is too intense for firms to not minimise its costs
SOCIAL EFFICIENCY
when social gain is maximised
when MSB=MSC
PERFECT COMPETITION
3.4 1
, TYPES OF MARKET STRUCTURES
MONOPOLY - one firm
OLIGOPOLY - only a few firms
MONOPOLISTIC COMPETITION - quite a few firms
PERFECT COMPETITION - many firms
CONDITIONS FOR PERFECT COMPETITION
MANY SMALL BUYERS AND SELLERS
no one firm or customer can influence the market
none have dominating power
PERFECT INFORMATION
this enables firms to know when other firms are making profits
this will attract them to join the market
all firms have the same costs as they can use the same production techniques
PRICE TAKERS
Price taker - all prices in the market are the same
this means that demand faced by an individual firm is perfectly elastic
PED = negative infinity
FREE ENTRY AND EXIT FROM THE MARKET
when a business is making profits anyone can join the market and start producing the profit for themself
as a result, businesses are unable to make huge profits in the long run
if they are making losses they can leave
in the long run
firms will be normal profit
the number of firms in the market can change
in the short run
the number of firms in the market is fixed
HOMOGENOUS PRODUCTS
identical products to other firms
if a firm raises its prices above competitors, no one will buy it
if a firm lowers its prices below competitors
they will not gain, because they can sell their products at the same price as everyone else
higher profit
PROFIT MAXIMISING EQUILIBRIUM
IN A PERFECT COMPETITION
P = MR = AR = demand
3.4 2
, horizontal line
PED = negative infinity
CONDITION FOR PROFIT MAXIMISATION UNDER PERFECT COMPETITION
MR=MC
in the long run, firms in perfect competition can only make a normal profit
DIAGRAM
PERFECT COMPETITION - SHORT RUN- SUPERNORMAL PROFIT
perfect competition means the price is set at P1
P=MR=AR=D (perfectly elastic demand curve)
this firm is making a supernormal profit (in yellow)
PERFECT COMPETITION - SHORT RUN - LOSS
perfect competition means price is set at P1
the firm is making a loss
LONG RUN ADJUSTMENT - SUPERNORMAL PROFIT
the firm is making a supernormal profit at P
this will cause other firms to enter the market to
also get that profit
this causes a outward shift in supply to S1
this causes the set price to decrease to P1
this results in the firm now making a normal profit
in the long run
LONG RUN ADJUSTMENT - LOSS
3.4 3
EFFICIENCY
Efficiency - used to judge how well the market allocated resources, and relationship between scarce inputs and outputs
ALLOCATIVE EFFICIENCY
This is achieved when resources are used to produce goods and services which consumers want and value the most
highly
social welfare is maximised
this occurs when the value to society from consumption = marginal cost of production
where P = MC or AR=MC
IS ACHIEVED in perfect competition
PRODUCTIVE EFFICIENCY
Achieved when products are produced at the lowest average cost
this means fewest resources are used to produce each product
minimum resources used to produce the maximum output
Can only exist when firms produce at the bottom of the AC curve
where MC = AC
IS ACHIEVED in perfect competition in the long run
DYNAMIC EFFICIENCY
Achieved when SNP is reinvested in R&D
reduces the production costs
improves product quality over time
NOT achieved in perfect competition
firms are unable to invest in r&d due to lack of supernormal profits
X - INEFFICIENCY
When a firm fails to minimise its average costs and profits at a given level of output due to lack of competition
Not producing on the lowest part of the AC curve
Often occurs when there is a lack of competition - firms have little incentive to cut costs
NOT achieved in perfect competition
the competition is too intense for firms to not minimise its costs
SOCIAL EFFICIENCY
when social gain is maximised
when MSB=MSC
PERFECT COMPETITION
3.4 1
, TYPES OF MARKET STRUCTURES
MONOPOLY - one firm
OLIGOPOLY - only a few firms
MONOPOLISTIC COMPETITION - quite a few firms
PERFECT COMPETITION - many firms
CONDITIONS FOR PERFECT COMPETITION
MANY SMALL BUYERS AND SELLERS
no one firm or customer can influence the market
none have dominating power
PERFECT INFORMATION
this enables firms to know when other firms are making profits
this will attract them to join the market
all firms have the same costs as they can use the same production techniques
PRICE TAKERS
Price taker - all prices in the market are the same
this means that demand faced by an individual firm is perfectly elastic
PED = negative infinity
FREE ENTRY AND EXIT FROM THE MARKET
when a business is making profits anyone can join the market and start producing the profit for themself
as a result, businesses are unable to make huge profits in the long run
if they are making losses they can leave
in the long run
firms will be normal profit
the number of firms in the market can change
in the short run
the number of firms in the market is fixed
HOMOGENOUS PRODUCTS
identical products to other firms
if a firm raises its prices above competitors, no one will buy it
if a firm lowers its prices below competitors
they will not gain, because they can sell their products at the same price as everyone else
higher profit
PROFIT MAXIMISING EQUILIBRIUM
IN A PERFECT COMPETITION
P = MR = AR = demand
3.4 2
, horizontal line
PED = negative infinity
CONDITION FOR PROFIT MAXIMISATION UNDER PERFECT COMPETITION
MR=MC
in the long run, firms in perfect competition can only make a normal profit
DIAGRAM
PERFECT COMPETITION - SHORT RUN- SUPERNORMAL PROFIT
perfect competition means the price is set at P1
P=MR=AR=D (perfectly elastic demand curve)
this firm is making a supernormal profit (in yellow)
PERFECT COMPETITION - SHORT RUN - LOSS
perfect competition means price is set at P1
the firm is making a loss
LONG RUN ADJUSTMENT - SUPERNORMAL PROFIT
the firm is making a supernormal profit at P
this will cause other firms to enter the market to
also get that profit
this causes a outward shift in supply to S1
this causes the set price to decrease to P1
this results in the firm now making a normal profit
in the long run
LONG RUN ADJUSTMENT - LOSS
3.4 3
