Allocative and Productive Efficiency in Perfectly Competitive Markets

Perfectly competitive markets, as rare as they are in reality, are useful to examine in theory, for they exhibit characteristics that no other market structure will exhibit. Specifically, perfectly competitive markets achieve a level of efficiency not likely to be seen in less competitive markets such as oligopoly, monopoly and monopolistic competition.

Efficiency in Economics is defined in two different ways: allocative efficiency, which deals with the quantity of output produced in a market, and productive efficiency, which requires that firms produce their products at the lowest average total cost possible. In perfect competition, both types of efficiency are achieved in the long-run.

This less will explain in detail what makes perfectly competitive markets economically efficient.

 

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