A perfectly competitive industry achieves allocative efficiency in the long run. what does allocative efficiency mean?
Answers
In the long run equilibrium perfectly competitive markets are able to achieve allocative efficiency and productive efficiency. Allocative efficiency refers to the way resources are allocated to their best alternative use.
Allocative efficiency occurs when industry is providing the greatest amount of satisfaction with its given resources. It is possible only in perfect competition market structure as in this firms produce at a price where there are zero economic profits.
So, in perfect competition firms can enter the market and drive prices down and production up to the point where allocative efficiency is achieved. The efficiency point is there PRICE=MARGINAL COST or P=MC
In both the short and long run we find that price is equal to marginal cost and thus allocative efficiency is achieved. At the ruling price, consumer and producer surplus are maximized.
A state of the economy in which the production or manufacture of goods signifies the preferences or choices of the customers is known as allocative efficiency.
The manufacture of every good takes place up to the point where the last unit produced offers a small benefit to customers which is equal to the marginal cost of the production.