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Market is said to be efficient or Pareto efficient when increasing some one’s benefit in the economy is not possible with making somebody else worse off. This may sound counter intuitive, as how can such a market be called efficient when there is no possibility of increasing…
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There may be two types of efficiency in the market Productive efficiency and Allocative efficiency.
The perfectly competitive market ensures maximum efficiency. In perfectly competitive the maximum profit point is where the marginal cost is equal to marginal benefit and since for them MR = AR= P. thus the profit maximization point i.e. MC =MR also ensures MC = MU (price). This means that in perfectly competitive markets the marginal benefit to the society derived by customers while consuming the product is just able to cover the marginal cost incurred by the society through the producer. Thus the marginal loss to the society is equal to the marginal benefit to the society which is a condition for efficiency. Which is not case with imperfectly competitive markets whose MU may not equal to MC at the point of profit maximization i.e. MR = MC, as for imperfectly competitive markets MR may not be equal to AR and price. Thus MC and price may not be equal.
An example of market very close to perfect competition is street vegetable market in developing countries. The products are almost similar and each buyer and seller is very small thus almost similar prices prevail. Thus MR = P = AR, and for profit maximization MC = MR which means MC = P (MU) which ensures utmost efficiency.
Figure 1 shows the profit maximizing point for a competitive market firm. The point for profit maximization is qe, as here MR = MC and since it’s perfectly competitive, AR = P = MR, thus MC = P, which shows the efficiency in the market.
b) The example of imperfect competition is tooth paste market in the US a lot of firms selling differentiated products to many buyers. In this case the firms don’t sell at similar prices and their demand curves are sloping downwards thus MR falls faster than AR and P. Thus when MC comes equal to MR MC is actually less than AR which keeps the prices ... Read More
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