- Explain the meaning of the term allocative efficiency.
- Explain that the condition for allocative efficiency is P = MC (or, with externalities, MSB = MSC).
- Explain, using a diagram, why a perfectly competitive market leads to allocative efficiency in both the short run and the long run.
- Explain the meaning of the term productive/technical efficiency.
- Explain that the condition for productive efficiency is that production takes place at minimum average total cost.
- Explain, using a diagram, why a perfectly competitive firm will be productively efficient in the long run, though not necessarily in the short run.
Today we will finish off the packet. You should read the article “Why is Perfect Competition Economically Efficient?” and p108-111 of textbook. Then use graphs to explain that in the short run firms in perfect competition are allocatively efficient but may not be productively efficient, whereas in the long run they are both allocatively and productively efficient.