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efficiency - consumers’(society’s total satisfaction is...

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Notes on Efficiency: P Pure vs. Imperfect Competition P M MC 1 . P vs. Q Given graph, imperfect competition L P m , Q m P C Perfect Comp Perfectly competitive pricing requires P = MC MR D which occurs at P C , Q C Q 0 Q M Q C 2 . Allocative Efficiency As shown above, the imperfectly competitive firm restricts output because it is in its own private best interest. But is it society’s best interest? If Q increases beyond Q M L P > MC for units Q M to Q C L Consumers are willing to pay more for additional units of the good than the opportunity cost (MC) of producing those additional units. L Society values additional units of this good more than the alternative goods that these resources could produce. L Society will get greater overall satisfaction if more resources are transferred to production of this good. L Satisfaction continues to increase as resources are added until P= MC. At this point,
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Unformatted text preview: consumers’ (society’s) total satisfaction is maximized. It is said that “Allocative Efficiency ” is achieved at this point. ∴ Imperfect competition produces too little to be allocatively efficient, in both short and long run. ∴ Perfect competition achieves allocative efficiency, in both short and long run. 3 . Productive (Technical) Efficiency Technical efficiency occurs when resource are being used in their most economical way. Taking all resources into account, technical efficiency is achieved at min. ATC; this frees up the maximum possible resources for other uses. Short run: Neither perfect nor imperfect competition necessarily achieves technical efficiency. 2 Long run: Perfect competition is technically efficient because P = min ATC. Imperfect competition is NOT technically efficient because P > min ATC for all 3 market structures....
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