Why are perfectly competitive markets efficient?
In the long run in a perfectly competitive market—because of the process of entry and exit—the price in the market is equal to the minimum of the long-run average cost curve. In other words, goods are being produced and sold at the lowest possible average cost.
Perfectly competitive firms have the least market power (i.e., perfectly competitive firms are price takers), which yields the most efficient outcome. Monopolies have the most market power, which yields the least efficient outcome.
Perfect competition is considered to be “perfect” because both allocative and productive efficiency are met at the same time in a long-run equilibrium.
Is perfect competition efficient? Yes. This efficiency is achieved because the profit-maximizing quantity of output produced by a perfectly competitive firm results in the equality between price and marginal cost.
Perfectly competitive market charges a price equivalent to the marginal cost and exhibits both productive and allocative efficiencies. Hence, it is the most efficient market structure.
Are perfectly competitive markets productively efficient in the long run? Yes, because firms produce at the lowest average cost possible. many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
Economic efficiency – competition will ensure that firms move towards productive efficiency. The threat of competition should lead to a faster rate of technological diffusion, as firms have to be responsive to the changing needs of consumers. This is known as dynamic efficiency.
The availability of free and perfect information in a perfectly competitive market ensures that each firm can produce its goods or services at exactly the same rate and with the same production techniques as another one in the market.
In the short run, perfect markets are not necessarily productively efficient. But in the long run, productive efficiency is achieved as new firms enter the market. Increased competition reduces price and cost to the minimum of the long run average costs.
Market efficiency refers to the degree to which market prices reflect all available, relevant information. If markets are efficient, then all information is already incorporated into prices, and so there is no way to "beat" the market because there are no undervalued or overvalued securities available.
Why are monopolistic firms less efficient than perfect competition?
A monopolistically competitive firm is not efficient because it does not produce at the minimum of its average cost curve or produce where P = MC. Thus, a monopolistically competitive firm will tend to produce a lower quantity at a higher cost and charge a higher price than a perfectly competitive firm.
Due to extra market power, the monopolist restricts quantity, sells at a higher price and earns supernormal profits. This allocative inefficiency is referred to as the dead weight loss triangle of non competition.
Perfectly competitive markets have no barriers to entry and exit; a firm can freely enter or leave an industry based on its perception of the market's profitability. In a monopolistic competitive market there are few barriers to entry and exit, but still more than in a perfectly competitive market.
A monopoly is less efficient in total gains from trade than a competitive market. Monopolies can become inefficient and less innovative over time because they do not have to compete with other producers in a marketplace.
Key Takeaways. Perfect competition is an ideal type of market structure where all producers and consumers have full and symmetric information and no transaction costs. There are a large number of producers and consumers competing with one another in this kind of environment.
Because the local monopoly sells a larger quantity at a lower price than what outside competition could provide, consumers are better off with the local monopolist. Overall, the local monopoly benefits consumers because it has lower cost and its market power is limited by outside competition.
Key Takeaways. Neoclassical economists claim that perfect competition—a theoretical market structure—would produce the best possible economic outcomes for both consumers and society. All real markets exist outside of the perfect competition model because it is an abstract, theoretical model.
Therefore perfect competition is said to be dynamically inefficient and can occur when the firms reduce their price, firms that were maximising profit in the fast will now not be able to maximise that profit. Which means firms will have less capital to reinvest back into the business on R&D.
Allocative efficiency occurs where price equals marginal cost in all parts of the economy. Again, with reference to Figure 1, it can be seen that in perfect competition, MR = MC, and MR = price. MC therefore equals price (at point Y), and allocative efficiency occurs.
Contrary to a monopolistic market, a perfectly competitive market has many buyers and sellers, and consumers can choose where they buy their goods and services. Companies earn just enough profit to stay in business and no more.
What is the most effective market structure and why?
Intuitively, perfectly competitive markets seem the best equipped to manage this, since, in the long run, the absence of firms with market power and the availability of perfect information mean that price equals marginal cost (the condition for allocative efficiency) and production is capped at the point where average ...
Strict perfect competition – allowing imitators to ensure P=MC – isn't good because it prevents us from getting new products.
In fact, monopoly (if left unregulated) is generally considered the most inefficient of the four market structures. The reason for this inefficiency is found with market control. As the only seller in the market, the negatively-sloped market demand curve is THE demand curve facing the monopoly.
Efficiency requires that consumers confront prices that equal marginal costs. Because a monopoly firm charges a price greater than marginal cost, consumers will consume less of the monopoly's good or service than is economically efficient.
