Question

The most efficient output ( LO7) a) is always equal to the most profitable output for the perfect competitor b) is never equal to the most profitable output for the perfect competitor c) is equal to the most profitable output for the perfect competitor only in the long run d) is equal to the most profitable output for the perfect competitor only in the short run

Short answer

The correct answer is option (c): "The most efficient output (LO7) is equal to the most profitable output for the perfect competitor only in the long run."

Step-by-step solution

Option a: Always equal

In a perfect competition, a firm's most efficient output is the point at which it produces at the lowest average total cost. Similarly, the most profitable output is the production level where the difference between the firm's total revenue and total cost is the highest. In the long run, due to the adjustments made by firms in the market, the most efficient output will be equal to the most profitable output. However, in the short run, due to various factors such as changes in demand and supply, the most efficient output may not necessarily be the same as the most profitable output, and so option (a) is not correct.

Option b: Never equal

As mentioned previously, in the long run, the most efficient output converges with the most profitable output due to adjustments made by the firms. Therefore, it is not true that the most efficient output is never equal to the most profitable output for the perfect competitor. So, option (b) is incorrect.

Option c: Equal only in the long run

In the long run, perfect competitors adjust their production to minimize their average total costs. As a result of these adjustments, the most efficient output will be equal to the most profitable output. This is because, in the long run, the price will be equal to the minimum average total cost due to market competition. So, option (c) is the correct choice.

Option d: Equal only in the short run

In the short run, the most efficient output may not necessarily be the same as the most profitable output for a perfect competitor due to factors such as changes in demand and supply. In the long run, these differences are resolved through adjustments made by the firms. So, option (d) is incorrect. #Conclusion#: The correct answer is option (c): "The most efficient output (LO7) is equal to the most profitable output for the perfect competitor only in the long run."

Key concepts

Efficient Output

In a perfectly competitive market, achieving efficient output means that firms are producing goods in the most cost-effective manner. This is achieved at the lowest point on the Average Total Cost (ATC) curve. At this level of production:

• Firms are minimizing their production costs.
• They make the best use of their resources.
• Further production would increase costs but not necessarily increase revenue.

This level of efficiency is vital as it ensures that the limited resources available in an economy are used optimally. However, being efficient is not always synonymous with maximizing profits, especially in the short term. This is because market factors like sudden demand shifts can temporarily raise costs or limit revenues.
While efficient output is keen on cost minimization, it is crucial to remember that a more comprehensive view considers profitability for sustainable business operations.

Profitable Output

Profitable output is where a firm's total revenue exceeds its total costs by the highest possible margin. At this output level:

• The firm is maximizing its profits.
• It not only covers all its costs but also earns a surplus.
• This surplus is the reward for entrepreneurs and serves as reinvestment capital.

In the short term, various market dynamics can influence this output level. A firm might find its profitability impacted by external factors, such as sudden price changes due to fluctuations in market demand. Therefore, while efficient output focuses on minimizing costs, profitable output focuses on maximizing the difference between revenues and costs, which sometimes leads to different production levels in the short run. Achieving profitable output ensures businesses thrive and remain competitive in the marketplace.

Long Run Equilibrium

In the context of perfect competition, long run equilibrium is where all firms in the market are making zero economic profits. This occurs because:

• New firms enter the market if there are opportunities for profit.
• Existing firms exit if they are incurring losses.
• Ultimately, only firms that can produce at the lowest cost remain.

In this state, the most efficient output aligns with the most profitable output. This happens because prices stabilize to where they are equivalent to the minimum average total cost. This convergence is vital as it reflects a mature market where resources are used efficiently, and no firm has a competitive advantage over the others. Long run equilibrium represents a stabilized condition where consumers get products at the lowest price possible, and firms operate efficiently without excess profits but covering all opportunity costs.