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Explain why Perfectly Competitive Industries are Considered to be Efficient in the Short and Long-Run - Essay Example

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Introduction: Economists have been filling pages about the key ingredients to success of an economy, global benefit, societal benefit and environmental benefit; this intense research for years has concluded that perfectly competitive market is the key to success…
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Explain why Perfectly Competitive Industries are Considered to be Efficient in the Short and Long-Run
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Explain why Perfectly Competitive Industries are Considered to be Efficient in the Short and Long-Run

Download file to see previous pages... There are pros and cons to both yet all reside on one opinion that the key to efficiency is competition. In order to present a concrete conclusion, we have to get into a profound discussion so as to compare pros with cons of perfectly competitive market and also discuss the variance it has with monopoly structure. Perfect Competition and Efficiency: According to Adam Smith perfectly competitive market works under “invisible hand” in which each individual in society seeks out for the personal interest. However, in order to preach it, he/she has to trade off his belongings with the individual who is willing to get benefited from it. This ultimately leads to benefit of society intentionally or unintentionally. Theoretically; there are many buyers and sellers, identical products, no barriers to entry as well as exit (Thomas E. Woods, 2011). Buyers and sellers both have the perfect information and hence they are the “price takers” which results in a perfectly elastic demand curve. This means that if a firm wants to maximize its profit it should sell its product at market price. This means that efficiency is required to keep the cost down and increase the net profit margin. Efficiency is realized when all opportunities to make someone better off without making anyone worse off are exhausted. It is also called ‘Pareto Efficiency’ in most of the global conceptions (Books Llc, 2010). Under ideal conditions in a perfectly competitive market or any other market which is functioning well, the market equilibrium maximizes the difference between the benefits society gets from the good and services and what it costs society to produce. A perfectly competitive market would always focus on the maximum net social benefit. Benefit is not only considered by the monetary return achieved from investments but also the implicit gain realized by the society as a whole. An efficient allotment of resources is accomplished if increment in society’s overall level of satisfaction by more of one good and less of another good is not possible. This is why competition is preferred as it mostly leads to favorable outcomes. Competition urges players to perform better than their rival which ultimately leads to better market mechanism. Such efficiency is realized by entities if the price of a good is equal to the marginal cost of the product. An elaboration of the above mechanism is as follows: We know from the above discussion that market supply shows the marginal cost of society of producing the good or service. Moreover, the demand curve is the marginal benefit to society from consuming the good or service. Therefore, the net social benefit would be maximized if the marginal social cost is equal to the marginal social benefit (Tucker, 2010). Considering the cost allocated to society, the market supply is the horizontal sum of each firm’s MC curve or in other words it shows what it costs to produce one additional unit of good. Economist says that if all the costs are digested by the firms, then supply equals the marginal social cost (Lambert M. Surhone, 2010). On the other hand, economists’ measure benefits in terms of the willingness of consumers to pay therefore, the market demand would be a representation of the total sum of willingness to pay for a unit of good at each level of consumption. The market demand mechanism focuses on maximization of social benefit illustrated below: All consumers whose WTP (willingness to pay) exceeds P will buy a good (or more ...Download file to see next pagesRead More
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