10.7 Pure Competition and Efficiency

What is the triple equality in long‑run perfect competition?

P = MC = minimum ATC.

What does P = minimum ATC mean?

Firms earn normal profit and produce at the lowest possible cost.

What does MC = minimum ATC mean?

The firm is producing at the minimum point of ATC → productive efficiency.

What does P = MC mean?

Allocative efficiency — society values the last unit exactly as much as it costs to produce.

What output does each firm produce in long‑run equilibrium?

The output level where P = MC = minimum ATC.

What is productive efficiency?

Producing goods in the least‑cost way.

What condition shows productive efficiency?

P = minimum ATC.

Why must firms be productively efficient in perfect competition?

High‑cost firms lose money and must lower costs or exit.

How do consumers benefit from productive efficiency?

They pay the lowest possible price given current technology.

What is allocative efficiency?

Producing the right goods — the goods society most wants.

What condition shows allocative efficiency?

P = MC.

What does the demand curve represent in allocative efficiency?

Marginal benefit — what consumers are willing to give up for each unit.

What does the supply curve represent in allocative efficiency?

Marginal opportunity cost — what society must give up to produce each unit.

Why is producing units where D > S beneficial?

MB > MC → society gains net benefits.

What is consumer surplus?

The difference between maximum willingness to pay and market price.

What is producer surplus?

The difference between market price and minimum acceptable price.

At what output is total surplus maximized?

At the equilibrium quantity where MB = MC.

What happens if output is less than the efficient quantity?

Total surplus is too small → underproduction.

What happens if output is greater than the efficient quantity?

Deadweight loss occurs → overproduction.

What happens when consumer tastes increase demand?

Price rises → P > MC → firms earn profit → industry expands → P returns to MC.

What happens when resource supply or technology changes MC?

P ≠ MC → firms adjust output → P = MC restored.

Why do dynamic adjustments matter?

They automatically restore allocative efficiency after shocks.

What is the invisible hand in perfect competition?

Self‑interest of firms leads to socially optimal outcomes.

How does profit‑seeking behavior create efficiency?

Firms maximize profit by producing where P = MC, which also maximizes society’s welfare.

What does the invisible hand ensure for private goods with no externalities?

Resources are allocated in a way that maximizes consumer satisfaction.

Why is the firm a price taker?

Because its MR curve is horizontal.

At the profit‑maximizing output, what is true?

Total revenue = total cost (normal profit).

What does the triple equality mean?

The “right goods” are produced in the “right ways.”

When P = MC for all firms, what happens in the market?

Total surplus is maximized.