Competition And Economic Efficiency Essay, Research Paper
Efficiency: refers to the relationship between the value of the benefit relative to the costs incurred to obtain the benefit. An activity is efficient if the total benefit exceeds the total cost. An outcome is efficient if there is no other outcome that makes someone better off without making someone worse off. Allocative efficiency: is achieved when resources are distributed among alternative uses such that the goods and services produces are those most highly valued by consumers. No rearrangement of resources could make someone better off without making someone else worse off. The condition for allocative efficiency is that ‘price = marginal cost.´ If this price of marginal is higher then the good is likely to be under consumed. When the marginal cost of the good is lower then the price then the good may be under-priced and over-consumed. Productive efficiency: refers to a firms average total cost of production. It is achieved when the output is achieved at minimum average total cost. The productively efficient output occurs when all the potential scale economies have been utilised(minimum efficient scale). Beyond the minimum efficient scale the firm may experience diseconomies of scale. Pareto optimality: a situation is economically efficient if there is no way to change it so that everyone gains or so that some people gain while no one else loses. Pareto optimality is achieved if ‘no one person can be made better off without making someone else at least as worse off´ Does competition lead to an improvement in economic efficiency? Competition is seen as a good thing. If a firm faces competition there will be advantages of producing at the lowest point of its long run average cost curve. If its long run average costs are below that of their competitors then there profits will be higher or they can charge a lower price. If its long run average costs are higher then it will risk going out of business. In this situation the firm must alter its activities to become more productively efficient.
Competition forces firms to produce what consumers demand. If firms produce goods that are in demand they may make more profits. If they are producing goods that are not in demand then they will make losses and possibly go out of business. In perfect competition the selling price is equal to the cost of producing that item as the firm only makes normal profits in the long run. Price equalling the marginal cost of production is the requirement allocative efficient point.
In a free and competitive market people will trade with each other. It is logical to assume that this trade will be mutually beneficial. In a free market no one will trade and become worse off but no trade in excess of this will take place. The free market automatically leads to pareto efficiency
Monopolistic competition among firms producing a given product and engaged in a given amount of promotional activity results in less economic efficiency and more excess capacity than does pure competition. Competition forces efficiency or the given business will simply fail. The typical monopolistically competitive firm achieves neither allocative nor productive efficiency. In a Monopoly competitive industries have many firms operating below optimal capacity.
Economic competition acts in market economy as a system which leads to optimal utilisation of economy resources and to effects on the side of consumers. It must be stated there that there are advantages to society of markets with little or no competition. Monopolists can use their abnormal profits to invest In research and development which can result in a better standard of living for all of us. Through the benefits of economies of scale monopolists average costs can be lower then in more competitive industries. The main benefit of competition is that it forces efficiency on a large scale and that is the main reason I believe competition improves economic efficiency.