Question

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

Short answer

A perfectly competitive market will display productive efficiency, as firms produce at the point where marginal cost (MC) equals marginal revenue (MR), maximizing their profits or minimizing losses. This ensures efficient resource utilization and minimum waste. Additionally, firms operate at the minimum point of their average total cost (ATC) curve, resulting in the lowest possible production cost for the entire industry.

Step-by-step solution

The Basics of Perfect Competition

A perfectly competitive market is characterized by a large number of firms, producing a homogenous good or service. No single firm has the ability to affect market price, as each firm is a price taker. Firms in perfect competition aim to maximize their profits by producing at the point where marginal cost (MC) equals marginal revenue (MR).

Determining Productive Efficiency

Productive efficiency occurs when a firm is producing at the lowest possible average total cost (ATC) level. This means that the firm is using its resources most efficiently and minimizing waste. In the context of a perfectly competitive market, we can evaluate whether the market achieves productive efficiency by analyzing the behavior of firms.

Marginal Costs and Marginal Revenue

In a perfectly competitive market, since each firm produces at the point where MC = MR, it's essential to understand the relationship between these two components. When a firm produces at the level of output where MC equals MR, it is maximizing its profits or minimizing its losses.

Minimum Average Total Cost

To determine whether a perfectly competitive market achieves productive efficiency, we need to evaluate if firms operate at the minimum point of the ATC curve. The minimum of the ATC curve is the point where a firm produces at the lowest average total cost.

Efficiency in Perfectly Competitive Market

Since a firm in a perfectly competitive market produces at the point where MC = MR, and the firms' MC curve intersects their ATC curve at its minimum, we can conclude that a perfectly competitive market displays productive efficiency. This is because every firm produces at the lowest possible ATC, which means the entire industry produces at the lowest possible cost. In summary, a perfectly competitive market does display productive efficiency because firms produce at the point where MC = MR, ensuring the maximum utilization of resources and minimizing waste. This enables firms to operate at the minimum point of their ATC curve, leading to the achievement of productive efficiency.