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Allocative Efficiency
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Allocative Efficiency
Definition
- This exists when a set of resources is used to produce the goods and services which people want
- AR = MC
- This exists when a set of resources is used to produce the goods and services which people want
Perfect Competition
- Are allocatively efficient as well as profit maximising firm
- They operate at point where demand equals supply
- Are allocatively efficient as well as profit maximising firm
Monopoly
- Not allocatively efficient as they are profit maximising firm
- The main assumption is that monopolies put up price and lower output
- This means consumer surplus is reduced and some producer surplus is removed
- There's an overall rise in producer surplus.
- Diagram on the left shows deadweight loss welfare
- Since monopoly is industry the green area shows no goods are sold at that price and no firm makes that many goods/services
- Again this is because monopolies are profit maximisers
- Since monopoly is industry the green area shows no goods are sold at that price and no firm makes that many goods/services
- Diagram on the left shows deadweight loss welfare
- There's an overall rise in producer surplus.
- This means consumer surplus is reduced and some producer surplus is removed
- The main assumption is that monopolies put up price and lower output
- Growth Maximising Monopolies may operate allocatively efficient
- Not allocatively efficient as they are profit maximising firm
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- Description
- Explanation of allocative efficiency for perfect competition and monopolies
- Created by
- Paarth Agarwal
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