7.3 Perfect Competition and Efficiency

Question 1

what are the three measures of efficiency

Answer 1

(1) Productive efficiency; (2) Allocative efficiency; (3) Dynamic efficiency

Question 2

what is (1)Productive efficiency;

Answer 2

• output produced with the least-cost combination of resources

Question 3

what determines whether something is productively efficient

Answer 3

o In the long run, this is achieved where LAC is at its minimum (Price = MC = LACmin)

Question 4

what is allocative efficiency

Answer 4

Firms produce output most highly valued by consumers.

Question 5

what determines allocative efficiency (top amount)

Answer 5

when Price=MB=MC

Question 6

what is dynamic efficiency

Answer 6

technological innovation

• helps firm productively efficient
• helps achieve allocation efficiency

Question 7

what is the argument for perfect competition in dynamic efficiency

Answer 7

firms in perfect competition= too small to invest heavily in Research & Development (to reduce cost, (though wont rev.)

Question 8

why do firms in long term shut down id P < LRAC

Answer 8

LRAC= only variable

Question 9

why is there only one price consistent with zero profit (minimum ATC) and what is that price in terms of supply

Answer 9

• Process of entry and exit ends when price and average total cost are driven to equality
  o // firms that remain make economic profit of 0
  o = only one price consistent with zero profit= minimum ATC
  ♣ = long term market quantity supplied

Question 10

what is the process of entry

Answer 10

• entry firms = quantity supplied = down + profits

o occurs when P is above ATC = encourages new firms

Question 11

what is the process of exit

Answer 11

• exit firms= quantity supplied = down + profits

o occurs when P below ATC = discourage entry