Economics Perfect Competition Questions Medium
Perfect competition and productive efficiency are closely related concepts in economics. In a perfectly competitive market, there are a large number of buyers and sellers, homogeneous products, perfect information, free entry and exit, and no market power for any individual firm.
Productive efficiency, on the other hand, refers to a situation where a firm produces goods and services at the lowest possible cost, given the available technology and resources. It occurs when a firm produces at the minimum average total cost (ATC) in the long run.
The relationship between perfect competition and productive efficiency is that perfect competition tends to promote and ensure productive efficiency in the long run. This is because in a perfectly competitive market, firms are price takers, meaning they have no control over the market price and must accept the prevailing price determined by the market forces of supply and demand.
Under perfect competition, firms have strong incentives to minimize their costs in order to maximize their profits. They are constantly driven to find more efficient production methods, utilize resources more effectively, and reduce wastage. This leads to firms operating at the lowest point on their long-run average cost curve, which represents productive efficiency.
Furthermore, in a perfectly competitive market, there is free entry and exit of firms. If a firm is not able to produce at the minimum ATC, it will face losses and eventually exit the market. This competitive pressure ensures that only the most efficient firms survive in the long run, further promoting productive efficiency.
In summary, perfect competition and productive efficiency are closely linked. Perfect competition provides the necessary conditions for firms to strive for productive efficiency by minimizing costs and operating at the lowest point on their long-run average cost curve.