Question

Do you agree that companies under perfect competition as well as monopoly are enjoying productive efficiency and allocative efficiency? what is condition for productive efficiency and allocative efficiency? Would be greatly appreciated if answer is in 5sentences and by your own, thank you.

Answer 1

Productive efficiency is situation where at the lowest possible cost the output is being produced, thus means where the firm is producing on the bottom point of its average total cost curve. But the marginal cost curve always passes through the lowest point of the average cost curve, thus the productive efficiency is achieved when MC= AC. It is attained in the long run for a perfect competition market. The firms with high unit costs may exit the industry when the market price is driven down by the forces of competition. Monopolist will not achieve productive efficiency because the firms will produce at an output which is less of the output of minimum ATC.

Allocative efficiency is situation when in all parts of the economy the price equals marginal cost. Thus at the ruling price, producer as well as consumer surplus are maximised. Under perfect competition MC equals price and thus allocative efficiency occurs. When a Monopoly is regulated, it demonstrates allocative efficiency. Allocative efficiency occurs at a point when a product is produced at a level which maximizes social welfare. In order to simulate allocative efficiency in a pure monopoly, governments set a price ceiling which causes the monopolist's demand curve to become horizontal (meaning that it becomes perfectly elastic).