Question

Will a perfectly competitive market display productive efficiency? Why or why not?

Short answer

A perfectly competitive market will display productive efficiency, as the market characteristics, including a large number of buyers and sellers, homogeneous products, free entry and exit, and perfect information, compel firms to minimize their average total costs to maximize profits and ensure long-term survival in the market.

Step-by-step solution

Definition of productive efficiency

Productive efficiency occurs when a firm produces its output at the lowest possible average total cost (ATC). In other words, the firm is utilizing all its resources in the most efficient way, without any waste, so it can minimize its costs and attain the highest possible profit.

Characteristics of perfectly competitive market

A perfectly competitive market consists of the following characteristics: 1. Large number of buyers and sellers: There are many buyers and sellers in the market, so no single buyer or seller can have any significant impact on the prices of the product. 2. Homogeneous products: The products offered by all the firms in the market are identical, so one product can be perfectly substituted for another product. 3. Free entry and exit: There are no barriers to entry or exit in the market which allows new firms to enter and compete with the existing firms, and inefficient firms to exit the market. 4. Perfect information: Both buyers and sellers have all the necessary information regarding the products and the market conditions, which allows them to make informed decisions.

Relation between perfectly competitive market and productive efficiency

In a perfectly competitive market, firms are price takers. They have no influence over the price, and they must take the prevailing market price as given. To maximize their profits, firms will try to minimize their costs, and this is accomplished by producing at the lowest possible ATC. As new firms enter the market, competition will increase, and each firm will have to become more efficient in order to continue being profitable. As a result, firms that cannot achieve productive efficiency will be unable to compete in the long run and will ultimately exit the market. Only those firms that can produce at the lowest possible ATC will remain in the market, leading to productive efficiency in the industry. Therefore, taking into account the characteristics of a perfectly competitive market, we can conclude that:

Conclusion

A perfectly competitive market will display productive efficiency because the characteristics of the market, such as a large number of buyers and sellers, homogeneous products, free entry and exit, and perfect information, push the firms to minimize their average total costs in order to maximize their profits and ensure their long-term survival in the market.